Mindtree campus in Bengaluru, India (Phorographer: Nishant Sharma/BloombergQuint)

What Makes Mindtree An Attractive Acquisition Target

At least two investors are reportedly in the race to acquire Café Coffee Day promoter VG Siddhartha and his company’s 20.4 percent stake in Mindtree Ltd.

These include Larsen & Toubro Infotech Ltd. and private equity firm KKR & Co., The Economic Times reported citing unnamed people.

While KKR refused to comment, BloombergQuint’s emailed query to L&T remained unanswered.

But what will a potential acquirer get? BloombergQuint looks at how Mindtree can add value:

Mindtree's management, according to the brokerage Anand Rathi, has been able to execute better than peers over longer durations despite showing quarterly volatility. It said that with major acquisitions behind, volatility in earnings will reduce and the prospect of the company earning $1 billion in revenue in FY19 opens doors to many opportunities.

Mindtree’s revenue has registered a compounded annual growth rate of 22 percent between FY08 to FY18 on a consolidated basis.

The company’s profit saw CAGR of 18.7 percent in the same period and its operating margin has been at 12-14 percent over the previous two financial years.

Healthy Gains

In the last 10 years, Mindtree’s share prices have appreciated 15 times which comes to a CAGR of 33 percent. In comparison, the Nifty IT Index rose five times in the period.

Deal Wins and Digital Share

The company has witnessed consistent deals wins over the past three years. Total contract value of digital services has seen a gradual uptick in the same period. In the December-ended quarter of FY19, digital services contributed nearly 50 percent to consolidated revenues, higher from 44 percent in same quarter last year.

A Kotak Institutional Equities report said, "Mindtree’s strong digital competencies, improving participation in large deals courtesy the advisory channel and portfolio alignment to growth areas will continue to drive above-industry revenue growth."

Segmental Pros and Cons

Like its peers, Mindtree earned a majority (92 percent) of its consolidated revenue from Americas and Europe.

While most of its peers get a majority of their revenue from Banking and Financial Services vertical, Mindtree’s four key revenue-generating verticals are evenly spread, aiding diversification across businesses.

Capital Allocation

Over the last five years, Mindtree has allocated nearly 50 percent of its free cash flows to dividends. Another 25 percent has been spent on acquisitions and capital expenditure each.

Rich Valuations

Mindtree currently trades at 19 times its FY19 forward price-to-earnings, according to Bloomberg consensus. This is the same as L&T Infotech and NIIT Technologies but much more expensive than Hexaware, Cyient and Zensar. IDFC Securities and Axis Capital, however, remain cautious on the stock. 22 out of 37 analysts tracked by Bloomberg have a Buy rating on Mindtree whereas 10 analysts have a Hold rating and 5 analysts assigning the stock a Sell rating.