MindTree Consulting: Another Giant in the Making?

The consolidation in the Indian software services post dotcom bust meant that
smaller companies got sidelined and many of them were either closed down or
acquired by larger ones, leaving a huge gap in middle markets.

As markets improved, smaller companies realized that with a strong focus on
offering specific domain solutions rather than general solutions, was the route
to success. Among the companies that realised this early in their life cycle is
Bangalore-based MindTree Consulting.

Founded in 1999, MindTree Consulting is an international IT and R&D services
company with development centers in India and the US. The company has a team of
over 4,000 professionals and offers IT services in application development and
maintenance, business intelligence solutions, ERP and supply chain management,
testing, mainframe, and iSeries support and enhancement. The company also
provides R&D services in the areas of product and semiconductor design,
operating systems, protocol engineering, embedded applications, product testing,
and licensing of intellectual property. In 2006, MindTree was awarded the MAKE
award for excellence in the area of Knowledge Management and was named the
leading service provider in the Human Capital Development category by Global
Services magazine. The International Association of Outsourcing Professionals
rated MindTree among the worlds top 100 outsourcing service providers for 2007.
MindTree has consistently been chosen as one of the best employers in several
independent surveys during the last three years. The company provides end-to-end
project execution through OneShore, a hybrid delivery model.

For the FYn07, MindTree clocked net revenues of Rs 590.3 crore in revenues
compared to Rs 448.8 crore achieved in the previous year, a growth of 31.5%.
Similarly, the net profit was Rs 90 crore compared to Rs 54.2 crore for the
previous year, a growth of 66.1%. The IT services revenue grew by 30% to Rs
445.9 crore while R&D services revenue grew by 37% to Rs 144.4 crore.

During the year 2006-07, MindTree commenced operations in Chennai and
acquired land in Bhubaneshwar to build its fifth development center in India. It
also opened offices in Dallas, Munich, Stockholm, and Sydney, bringing the total
number of worldwide offices to eighteen. Seventeen new customers were added
during the recently completed quarter, bringing the current active customer base
to 155 for the whole year, including thirty-six Fortune 500 companies. MindTree
launched its Infrastructure Management and Tech Support Practice (IMTS). The
companys IMTS business undertakes end-to-end responsibility of managing IT
infrastructure of global enterprises and provides private-labelled technical
support for enterprise class technology products.

Net revenues for the 2nd quarter ended September 30, 2007 increased by 41.2%
y-o-y from Rs 153.71 crore the previous year to Rs 181.9 crore. While Profit
After Tax (PAT) grew by 31.8% q-o-q and 21.2% y-o-y from Rs 22.40 crore the
previous year to Rs 27.1 crore, IT services revenue grew by 15.1% and R&D
services by 15.7% q-o-q.

During the quarter, MindTree added twenty-eight new clients taking its active
client base to 192. Three of these twenty-eight customers are Fortune 500
companies, including a global financial services firm, a world leader in
consumer electronics, and a global beverages leader. With a focus on further
strengthening its presence in the European market, MindTree opened its office at
The Hague, Netherlands, during the quarter. The company increased its large
account portfolio and deepened some of the existing client relationships during
the quarter. It has increased the number of $1 mn clients from thirty-four to
forty-one. MindTree recruited 784 new employees, taking the total to 4,896 as on
September 30, 2007.

Recently, the company announced a major restructuring. These changes will be
effective from April 01, 2008 and expand the role of more than 150 leaders
throughout the organization. The large-scale changes will facilitate newer
business opportunities, building focus on the leadership development. Similarly,
MindTree signed a definitive agreement to acquire 100% equity in TES-PV
Electronic Solutions (Purple Vision), the India-based, fully owned subsidiary of
TES Electronic Solutions SA. MindTree will acquire Purple Vision in an all-cash
deal of $ 6.55 mn.

For FY 08, MindTree expects to achieve $17.8-180 mn revenues, indicating a
growth of 36% at the higher end. PAT is expected to be in the range of
$25.1-25.2 mn, a 26.4% growth at the higher end. EPS is expected to be in the
range of Rs 28.9 and 29.5. The above guidance is on the basis of Rs 42.25.

Shares of MindTree currently trade at Rs 510, discounting its FY 08 earnings
by twenty times which compares favorably with other companies in the small size
sector. Lower margins and uncertainty over the restructuring would, however,
limit the further appreciation of the stock over its competitors. Market
Performer.

Sushanto Mitra

The author is director, Techcap India

sushanto@techcapIndia.com

The views reflected here are of the author and not of this publication. No
liability is accepted for losses based on the information presented here