Tuesday, 2 October 2012

Incredible Stocks- MindTree

The IT industry is a has a strong foothold in India. By their very nature, an IT company can be a very low-debt and fast growth company if the management has the correct vision.

The fact that IT sector has been the driver of the economic boom for the Indian middle class leading to greater spending power and greater consumer economics is an undisputable fact.
Presently the IT sector contributes towards 7.5% of India's GDP and is expected to increase in the coming years. Indirectly too, the IT sector has been the driving force for the rapid growth of many other sectors like banking, finance, service, insurance etc. Although, presently the IT sector caters to domestic and international clients, it can be safely said that in-case of a change of scenario in the international side too, the domestic demand for IT and ITeS products is ever increasing as more and more sectors are going for IT solutions and consultancy. This is enough to keep the growth trajectory intact.

All the above facts readily point out that the IT sector offers great investment opportunity. We should look into this sector to find a good stock to invest.

We decided to base this article on MindTree because unlike other well established companies this is a mid-sized company but one which definitely has good growth markers in its favour. For our purpose we have taken the data from 2008 to 2012.

MindTree has shown a revenue growth from 733.84Cr to 2361.8Cr leading to a CAGR of 27.10%. It has a debt/equity ratio of 0.05 which is very low signalling good protection for shareholder equity and also a good pointer that the company can grow in the near future. The net profit has grown from 104.18Cr in 2008 to 218.70 in 2012 leading to a CAGR of 20.37%. The networth of the company has also grown steadily over the 4yrs from 534.02Cr to 957.60Cr.

Mindtree has an interest coverage ratio of 423 showing that it is in a better position to service its debt from the operational income.

The company has an ROCE of 32.07% in FY2013 which has grown from 18.85% in FY2008 as company is expanding its asset size to 1002Cr with a long and short term liability of 44Cr which is backed by its fixed and current assets. The OPM of FY13 is 20.59%. It gives a sign of a better pricing power and also hints at margin expansion. According to recent news in industry circles, MindTree which was till now doing business deals of an average $10Mn is now eyeing for $25-50Mn business deals.

Stocks can prove to be good investment options. If you are to treat stocks as investment, just like other investment instruments, then study of the company is an important factor. For any company the parameters are only half the story, the other half should be digged out from news related to the company and industry as we have done above.

We can conclude our analysis of MindTree by saying that low debt, asset expansion and an ambitious and credible management is the one recipe for good growth in the future. MindTree seems to have all of that. The potential that the company can exploit by way of the Indian and international clientele is also huge.

The valuation of the stock is currently attractive if we predict FYE’14 EPS.

The CMP at the time of the post was Rs. 666.40

Now was that the reason that one of the main shareholder of the company increased his holding in MindTree to about 21% recently?!!

Only time will tell.