MindTree Limited

Financial Statements Analysis 2008-09

Muthu Subramanian K June 2009

Current Market price: 425

Target Price: ~200
Trade Call: Sell
Investment Risk Level (@ Current price): High Risk (and High Gains?)

Table of Contents
Profit & Loss Statement (2008-09)......................................................................................................1
Balance Sheet (2008-09)......................................................................................................................3
Analysis................................................................................................................................................3
Initiatives taken by MindTree...............................................................................................................4
Comparisons.........................................................................................................................................4
Conclusions..........................................................................................................................................4
Disclaimer.............................................................................................................................................4

Profit & Loss Statement (2008-09)

One key item to be noted in MindTree's P&L is the Exchange Losses. When a company does
hedging, I would say, it is for avoiding the volatility of the exchange rates. So, it really doesn't make
sense to blame the Exchange losses for lower profitability/profits. Whether it is Exchange Profits or
Losses, MindTree's final revenues/margins are well known to the management when they hedge.

Also, looking at the P&L statement in the shown way might give a different perceptive than the one
portrayed in the Annual Report.
Revenues 8,44,05,39,576 Revenues here is income minus exchange losses
COGS 5,69,43,73,711 Software development expenses
Gross Income 2,74,61,65,865

Admin & Other expenses 1,79,01,40,717

PBIT 95,60,25,148
Interest 16,19,91,560
Depreciation 46,85,79,708
PBT 32,54,53,880
Tax 8,02,96,923
Deferred tax -5,48,95,172
Net Income 30,00,52,129
N Shares 3,77,84,844
(In Rupees)
Current book value of MindTree share: Rs. 1401
Current P/E (by my calculations): 53.522
Degree of Financial Leverage: 11.86
Gross margins: 32.54%
Net Margins: 3.55%

1 5303578058/37996686
2 425/7.94
Balance Sheet (2008-09)
Re-arranged for comparisons (or for a different perspective).
Assets Liabilities
Equity 37,99,66,860
Reserves and surplus 4,92,36,08,198
Share capital 3,000
Loans 1,39,36,72,670
Current assets 3,66,93,23,763
Current liabilities 2,49,88,20,621
Provisions 16,42,71,368
Fixed assets 2,43,79,14,439
Investments 3,10,83,60,192
Deferred tax assets 14,47,44,323

Total 9,36,03,42,717 9,36,03,42,717

MindTree's current liabilities have more than doubled while current assets have increased only by
Rs 40 crores. Digging deeper Schedule 10 shows other liabilities have increased by almost 150%. It
is difficult to comment without knowing the nature of this liability – but I am taking a pessimistic
view on this, otherwise why at all write a major chunk of current liabilities in other liabilities? - it is
more than 96.58% of the current liabilities.

Analysis
1. Current utilization levels of MindTree 60-70%. This is currently considered bad when
compared with about 80-85% utilization levels in the industry.
2. Top 0.72% of the employees are paid about 4.22% of the salaries. In absolute terms top 54
employees are paid about Rs. 16,61,00,000 (in total). This should be good in comparison
with other IT companies whose top executives are paid more than Rs. 2-3crores each. On
the pessimistic view this could be because of the size of MindTree.
3. Current DFL (which is close to 12) is very high. Hence can be considered very risky and if
MindTree's is able to perform well, then high gains as well.
4. Similarly, Operating Leverage is also high (considering utilization levels), so expect higher
gains with of-course higher risks.
5. MindTree's Gross Margins are quiet good, while Net margins are very bad – could be
because of unusually high Admin & other expenses (Note: Exchange losses are excluded for
this calculation).
6. Du-pont Analysis
1. ROE: 0.06
2. Net Income/PBT: 0.92
3. PBT/PBIT: 0.34
4. EBIT/Sales: 0.11
5. Sales/Assets: 1.26
6. Assets/Equity: 1.26
7. EBIT/Sales is too low, Again could be because of unusually high Admin/other expenses.
7. Current ratio decreased from 2.87 to 1.47
8. Work-in-progress has considerably fallen. Again, pessimistic view, Lack of work?
9. Investments have almost doubled. This is because of MindTree-Aztecsoft merger. Is this a
wrong-time high-price buy? Only time will tell.
Initiatives taken by MindTree
1. Reduced perquisites to employees (like coffee/tea, biscuits): Should save around Rs. 2-3
crores per year.
2. Increased travel charges collected from employees: Should save another Rs. 2-3 crores
(lower estimate)
3. Increased pressure to re-skill employees: Should mostly work in favor of MindTree
4. No promotion or increments: Similar to all other companies in this industry
5. Increase in the number of internal projects: Should increase the utilization levels and with
some luck increases the number of IP-led-services for MindTree.

Caution:
Though the initiatives taken by MindTree are for the benefit of MindTree and its stake holders
(including employees), the employees' motivation levels might come down and hence decrease the
quality of output.

Comparisons
Comparisons with data from Google Finance
Wipro Infosys MindTree
P/E 14.25% 16.69 31.52
Net Profit Margin 14.92% 27.60% 4.34%
Operating Margin 17.41% 29.66% 4.88%
EBITD Margin 20.98% 33.17% 27.68%
Return on Equity 30.80% 37.37% N/A

Conclusions

MindTree seems to have given a rosy picture for the near future (2009-10) – and probably is the
reason for the current high price. Considering this, MindTree's performance this year (2008-09)
could be a pebble in the growth path or a rock. I would say, if you are risk averse, don't trade in
MindTree stock for few more months.
Also, by analyzing the way MindTree's few top-executives trade3, I would say MindTree's stock in
the price range of Rs. 200-Rs.250 is a good buy and selling above Rs. 350 is a good sell.

Disclaimer
I have tried my best to give a balanced and an external view but these are my personal views and
any use of this is at your own risk. I don't even guarantee its accuracy.

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3 Ashok Soota seems to have bought more shares when price was hovering around Rs. 200, while few others (like
Subroto Bagchi) seem to have sold in the Rs. 350-400 range. Ref: Corporate announcements in NSE.