Stock Pick from Computers Sector

Here is why

• Considerable order growth in new technologies

• Staler financial performance in Q2FY16 with improved 

• Acquisition to strengthen its offerings and position in the market

India is the world's largest out sourcing destination for the information technology (IT) industry. The industry has helped the economic transformation of the country and altered the perception of India in the global economy. India's cost competitiveness in providing IT services continues to be its unique selling proposition in the global sourcing market. In this demanding industry, MindTree is showing resilient performance despite of ever-changing business environment.

MindTree delivers digital transformation and technology services from ideation to execution, enabling Global 2000 clients to outperform the competition. The company has deep expertise in infrastructure and applications management which helps it to optimize IT into a strategic asset. Recently on November 4, 2015, MindTree has been named a Top 10 Outsourcing Service Provider in the Americas and EMEA regions by Information Services Group (ISG). The company is among the leading providers in the breakthrough category for both the regions based on annual contract value won over the last 12 months.

MindTree’s growth is predominantly driven by new technologies including Digital segment which contributed around 36 per cent of its revenue. The company signed total contract value (TCVs) of USD193 million in Q2FY16, up by 17 per cent on yearly basis. Digital deals formed 76 and 82 per cent of TCVs in the Q1FY16 and Q2FY16 respectively. Digital revenues (excluding acquisitions) grew 9.6 per cent on sequential basis. As per the company’s management, the digital services are not discretionary in nature and it doesn’t expect any volatility in quarterly performance from a higher proportion of digital deals in the order book.

On financial front, in Q2FY16 MindTree posted an outstanding performance wherein its total income rose by 19.12 per cent to Rs 1169.3 crore on sequential basis. Volume growth was exceptionally strong at 8.4 per cent sequentially in Q1FY16. The substantial revenue growth during the quarter drove a considerable operating margin expansion. On organic basis, operating margin was at 19.1 per cent as compared to 17.6 per cent in the previous quarter. The significant improvement was driven by rupee depreciation, operational improvements and absence of visa cost compared to in Q1FY16. The Net profit too jumped by 14.47 per cent to Rs 158.2 crore in Q2FY16 compared to RS 138 crore in Q1FY16.

In the June quarter, MindTree had bought two firms for USD 77 million. The company purchased UK-based Bluefin Solutions for Euro 42.3 million in a bid to strengthen its presence in the digital space, aiming to make this a USD 220 million business by 2020. It also bought US-based Relational Solutions for USD10 million to provide better analytics related services to its consumer packaged goods clients.

With the recent staler financial performance and acquisitions in order to strengthen its offerings, MindTree is in better position compared to its peer companies in the market. Further, the company is trading a PE ratio of 23.47x times its latest EPS of Rs 63.95 per equity share. With a considerable order inflow in digital segment and improving margins, it looks an attractive investment opportunity.