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Mindtree IPO Analysis

Mindtree Consulting is offering shares in an IPO between 9th and 14th Feb 2007. The offer is for around 56 lakh shares, of which about 6.6 lakh shares are reserved for employees and customers.

Price : Rs. 365 to Rs. 425 per share
Issue size: 204 cr. to 238 cr.
Pre Issue Shares: 3.17 cr. shares
Post issue public equity: 15% (total: 3.73 cr. shares)
FY 07 EPS : (Pre issue) Rs. 27.55 annualised.
P/E: 13.25 (lower band) and 15.43 (upper band)

The company
Mindtree provides software services – R&D and IT services. While the company provides standard IT services such as software development, consulting, data warehousing etc. it also has a research arm that produces proprietary technology in the wireless space.

The company was started in 1999 by Ashok Soota, previously CEO of Wipro Technologies. Another famous MindTree “mind” is Subroto Bagchi, their COO. Capital was initally provided by Walden Investments and by Amalgamated Investments, a V.G.Siddhartha company. (Siddhartha owns Coffee Day, and has seed funded a large number of tech ventures like Kshema Technologies)

Further funding has been obtained from Global Technology Ventures (another Siddhartha company), Capital International and Franklin investments, and a customer, AIG, has also chipped in. In the last two years, the company acquired three different companies for a total of 33 cr.

What are the funds for?
Mindtree intends to build a big development center in Chennai, for which they’ll spend about 12 cr. This will be in an SEZ, which ensures that they don’t pay income tax for the near future.

18.7 crores will be used to immediately pre-pay a loan from HSBC.

That adds up to about 30 crores. The rest of the issue is for “general corporate purposes” and issue related expenses. Let’s say the issue expenses are about 12cr (6%) – so nearly 188 cr. at the higher band is now unallocated!

Mindtree has acquired an IC design company for cash on Jan 10, 2007. No further details are available, but I assume that IPO proceeds will be used for the acquisition and perhaps for further expansion.

Valuation
I am happy that this company has provided financial data upto December 31, 2006. Mindtree grew at about 46% annually over the last four years (revenue wise) and profit has grown from from 17 cr. in FY05 to a forward looking 87 cr in FY07. (annualised growth of 121% ).

Revenue and Profits for 9M FY07 are 407 cr and 65 cr respectively, which is a pre-issue EPS of Rs. 20.66.

Annualised EPS for FYO7 is Rs. 27.55. The corresponding upper band P/E ratio is 15.43.

(Note: this does not account for about 24 lakh shares as outstanding ESOPs, but they won’t affect the valuation by much – about 8%)

Most competing companies have a much higher P/E – most of the top companies like Infosys, Wipro and TCS command over 30 P/E and most second rung companies (like Tech mahindra, Visualsoft, Patni) get 25+. The only comparable company is NIIT Technologies which gets a P/E of 16, still higher.

I feel the company is extremely cheap at this IPO price.

Other interesting points
Mindtree has always wanted to contribute to society and has provided 6500 shares to the Spastics society, so that they will reap benefits as the company grows. This, and their other social responsibility initiatives are highlighted on the company web page and shows their commitment to social growth.

Low top management compensation: Ashok Soota has a CTC of only 60 lakhs, and Subroto Bagchi of Rs. 30 lakhs. This is much lower than what other companies pay their middle management! This is good for shareholders of course, but I wouldn’t mind a 300% increase in top management compensation, based on performance.

The company has about 40 cr. in cash investments which is about Rs. 10 per share (post issue).

Problems
In general, I feel that there are some issues with the tech story going forward. The dollar looks to be under some pressure with India’s market rating improving, and if more dollars come in (as investment) the rupee will gain and the dollar will lose. A slide in the dollar will affect exporters – and therefore the margins of most tech companies.

Compensation overheating: With salaries growing at over 20% in real terms, there is immense pressure on margins. Additionally, there is high attrition – nearly 20% – which affects profitability in terms of hiring and retraining costs. The market itself is overheated, and there is a severe lack of high quality middle management. Mindtree, though, has been rated among the best companies to work with (in India), and that cultural advantage will benefit it very much in these mercenary times.

Lack of H1-B visas: With so many tech companies in the fray, the limited number of H1-B visas to the U.S. (which are work permits) is slated to be used up in a very short period, some say by April 15. Lack of work permits means lower onsite presence, which reduces the growth potential by a little bit – onsite presence is required even for projects which are mostly done in India, because contracts are usually fashioned with a mix of onsite and offsite personnel.

Debt: Even though some debt will be retired through the issue, there is still some debt left over from HSBC and OBC. This is all less than 10%, but excess cash from the IPO should have been used to remove such debt – to leave the door open for further leveraged acquisitions later.

Overall recommendation
At the valuation given, this is a blind buy. “Aankh band kar ke le lo” types.

But I think this IPO will be severely oversubscribed so there is simply be no point in holding up your money in it – I would recommend buying after it lists (around March 9 or so). Yes, you will end up paying substantially more than the IPO price. But the Firstsource IPO was oversubscribed 50 times, and I expect as much for this IPO. Frankly, I don’t think you will get many shares for your money. So why lock the money?

Buy at any price upto Rs. 800. Remember that they have announced an acquisition but more details are forthcoming – and that acquisition in a new space (IC Design) will surely prop up the share price later, when they provide the details.

  • Anonymous says:

    >Hi Deepak,
    excellent analysis.I was waiting for this analysis since monday.Just had few questions in mind and hope that you’ll answer them.
    Is there any upper limit for employees of MindTree for this issue and are they allotted shares at some discounted price?
    Also ,if they are alotted shares can they sell it on the day of listing in secondary market?

    I am sure this issue is going to make few more millionares in the software industry.
    Also, what do you think about PFC and Indian Bank’s IPO?
    disclosure:i am not an employee of MindTree 🙂

    Thanks,
    Anshul

  • Deepak Shenoy says:

    >Anshul: Thanks! There’s no upper limit for employees (no 1 lakh limit etc.) and they get it at the same price as the others (no discount). They can sell on the day of listing – there’s no lock in or such.

    PFC and Indian Bank IPOs – haven’t had the time to analyse…shall try if I can, but I’m not too keen on the entire IPO market nowadays, too much oversubscription!

  • Anonymous says:

    >Thanks for the reply.
    Can you give me some pointers to some site/books where I can learn to analyse myself.?

  • Anonymous says:

    >Deepak
    With only about 15 lakh shares available for retail investors this IPO is gonna be oversubscribed like hell.Its just gonna be a lottery.However I’m willing to block my money for 21 days to get a piece of this IPO.
    Do u know of any strategy to improve our chances of getting allotment even if its just the minimum market lot?I checked basis of allotment of some other IPO’s and saw that the ratio of allotment is higher for those in higher market lot categories.Is every category considered separately for allotment or is the whole retail category divided by oversubscription that decides the allotment? The basis of allotment is just so confusing.I’d appreciate it if u could enlighten me on that.
    Thanks
    Vikram

  • Anonymous says:

    >Deepak,

    Is there any chance that this scrip is going to cross rs 1000 in the near future ….if yes howlong

  • Deepak Shenoy says:

    >Vikram: In general, higher subscription (no. of shares above the final price) = higher allocation (usually). How it works is that they work out for every number of shares bid for, how many should be given. Like if you have bid for 200 shares at Rs. 425, they may say they will give 50 shares only. But still they can’t give that to everyone bidding for 200 shares, because there’s oversubscription – so they say that they will give allotment to only 10 out of 25 bidders (40% allocation). They repeat this for each lot of shares bid (one for 15 shares, 30 shares …215 shares, one for 230 etc. – in multiples of the lot size)

    You might have a better chance of allotment if you choose an odd lot size like 185 shares. But again, if a lot of people think like this…

    Anonymous: I don’t know but in this environment 1000 does not look too far away. The current “grey market” premium for this share is about 400 Rs. which will give you an indication of how popular it is.

  • Anonymous says:

    >Hi Deepak,
    Thanks for the analysis. What is the past performance of this company ? (like say for the past 5 years)
    Couldnt it be possible that a company show high profit just the year before IPO ?

  • Deepak Shenoy says:

    >Anonymous: Yes of course, they could shore it up – but they have a consistent performance record through the last five years – they were under losses till about three years ago, and last year (FY06) they made about 55 cr. net profit. In teh first nine months of this year (FY07) they have already done 65 cr.

    Most other companies have a spike in their IPO documents – usually just the last two quarters or so. Like GMR and Naukri IPOs. But this one is very clean, and consistent.

  • Anonymous says:

    >I don’t think the allotmanet happens this way. AFAIK shares alloted = number of shares applied/oversubscription.
    Example : If you aplly for 200 shares and it is oversubscribed 20 time then you’ll get 200/20 = 10 shares.

    Correct me if I am wronge.

  • Dev says:

    >You have another blogger doing a Kavya Vishwanathan on your blog

    Here is the link

    http://www.blogfeast.net/sakreg/mindtree_ipo_analysis

  • Deepak Shenoy says:

    >Dev: Thanks for the heads up!I have sent a message to the site about this, and I hope they will take the post out.

  • Deepak Shenoy says:

    >Anonymous: See this link.

    You’ll see in the “Allocation to Retail Investors” section how the allocation is done. It’s a table giving you, for each bid lot (multiples of 7 shares) how many shares are given. Plus, look at the “ratio” column to see if everyone who bid for that gets allotment (“FIRM”) or if it is by lottery (X:Y, meaning X out of Y applications are randomly selected for allocation)

    For example, if you bid for 14 shares, you would get 7, but the allocation was 4:5, meaning out of 5 applications for 14 shares only 4 would get 7 shares alloted. (Any unallocated money is refunded)

  • ramki830 says:

    >Hi Deepak,

    It was an interesting analysis. Looking forward to see a similar IPO analysis of IDEA Cellular IPO in your blog.

  • Anonymous says:

    >Hi Deepak,
    Thanks, What is your opinion about Idea Cellular and Raj TV IPOs?

    Regards
    Giri

  • Anonymous says:

    >Hi Deepak,
    I looked at the link you supplied above, detailing final allocation in the TCS IPO. Looking at the numbers, it appears that –
    1. The greater the number of shares you apply for, the larger is your allocation. Thus, trying to guess an ‘odd number of shares that few others would apply for’ is pointless. You should simply apply for the largest number that you can afford.
    2. The allocation ratio is also always larger for a bigger lot than a smaller lot. Since ‘expected allocation’ = ‘shares allocated’ times ‘allocation ratio’, its better to put in one application for say 100 shares instead of two for 50 each, etc.
    For example, if you applied for 14 shares, your ‘expected allocation’ would be 7*(4/5) = 5.6 shares. Instead, if you put in two applications for 7 shares each, your ‘expected allocation’ would be 2*7*(6/17) = 4.94 shares.

    I am wondering whether these rules are valid for all IPOs, or if they are merely pecularities followed by TCS. Comments anyone?

    regards,
    Anon1

  • Deepak Shenoy says:

    >Anon1: 1) True, though allocation as a percentage of money put in is a better ratio for odd lots.
    2) For the same demat account, you can’t put in multiple applications 🙂 Your findings ring true though.

    The exact allocaiton ratio varies from IPO too IPO but point 1. usually stays valid. Point 2 is usually different – lower lots have much higher lottery components.

    But IPOs are all rigged nowadays, or so it seems. Somehow it seems like grey market operators are driving it up unnecessarily.

  • Sriram says:

    >I can’t seem to find any info regarding oversubscription in MindTree IPO. Do you have any news to share?

  • Parthasarathi says:

    >Hello Deepak,

    Thanks much for an excelent analysis. It was nice to read your post, gthis one and other ones too in general.

    Normally when would shares get listed at BSE/NSE [ get traded ] , after the IPO. For instance in the case of mindtree whose IPO got over yesterday [ 14th Feb ].

    TIA,
    Parth

  • Deepak Shenoy says:

    >Parth: Usually 3 weeks or so. I think Mindtree’s listing on 10 March.

  • Anonymous says:

    >Short term capital gain question:
    Hi Deepak,
    i had bought some small shares 2 years back and have made a loss of about 16k in it so far !

    Now i have applied for the Mindtree shares (105), assuming that i get some allotments and i sell them on the listing day, it will be a short term gain for me.

    When computing the short term capital gain for the tax purposes, can i take (short term gain – long term loss) ??

    Also could you please give me your mail id ? Mine is shares.vinayaka@gmail.com

  • Deepak Shenoy says:

    >Unfortunately you can’t set off long term loss against short term gain. Short term gain can only be set off aginst short term loss. Long term loss can only be set off against long term gain but that’s of no use because you dont pay tax on long term gain anyhow.

    All the best for your allotment!

  • Anonymous says:

    >Hi Deepak,
    Thanks a lot for the info.

    Also i am planning to buy a ELSS MF for Tax purposes (About 25k), which one do u Suggest ? Or shall i split and buy 2-3 of them ?

    Cheers
    Vinayaka CA
    shares.vinayaka@gmail.com

  • Krishnan says:

    >Nice blog.However it may interest you that of late if you have a good issue,the trick is to offer only 50-60 lakh shares as in the case of Mind tree and GBN.Of course also the notorious Nissan Copper.With about 12.5 lakh shares going to retailers,any reasonable sized operator can jack up share prices to astronomical levels.The listing of GBN is an example and Mind Tree will also list with a huge gap on upside.

  • Deepak Shenoy says:

    >krishnan: Thanks – and yes, you raise an important point. It’s happened with GBN, which I’d mentioned in another post (“scarcity potential”) and I’m sure it will happen with mindtree as well. I don’t understand the concept of diluting only 10-15% of the capital – even GMR Infrastructure is overbought because of such low floating stock.

    Operators are now more active than at any other time in history; this is perhaps the time to sit out the next round and sell the ridiculously overvalued shares.

  • Anonymous says:

    >Hi Deepak,
    Understood that Mindtree is growing fast and has an excellent management but if you compare it with a company like Prithvi, I think that the crowd is just after Mindtree. Prithvi is a company growing very fast and is of similar size as Mindtree. It has so low PE and ICICI and Deustche bank has recently put a lot of money in it. Mindtree is being offered at 425 and Prithvi at 45 EPS is trading at 345. At least one good thing I see better in Mindtree is management quality

  • Anonymous says:

    >Any idea @ what percentage or ratio the employee quota and employee quota got allocated ?

  • Deepak Shenoy says:

    >I think it was 100% allocated – so everyone got what they bid for – you cna check at:
    http://mondkarcomputers.com/ipo.asp

  • Anonymous says:

    >I bid for maximum amount of shares possible for retail investor i.e 225@425 = 95625. I did not get any shares. I checked lot of other random application numbers on mondkarcomputers.com, some people who applied for 225 shares got only 15. Which basically means at highest lot also there was lottery. It seems 1 out of 5 got it( just guessing based on random numbers of application numbers I checked on thier website)
    So it was lottery and allocation ratio was also very low.

    I fail to uderstand how come? was this IPO rigged?

    what do you guys think

  • himanav says:

    >Deepak,
    I read your blog regularly. Though quite a informed indian investor myself, I still find very good points/analysis/comments on your blogs that I have missed/not understood/overlooked.

    What I especially like about your blog is to put things in very simple english to explain to people. Keep up the good work.

    I wanted to comment on your IPO analysis of MindTree earlier but could not do so, because I work for MindTree and don’t want to create any legal confusion.

    Anyways, I saw somebody on blog asking MindTree employee subscription levels. It was subscribed more than 7 times (can you imagine that, 7 times). Business associates category (that is clubbed with employee quota) was undersubscribed and hence combined effect was that employee quota was oversubscribed just below 4 times.

    The allocation in employee category was proportional (unlike retail where there was lottery).

    IPO allocation PLUS ESOPS(already vested and excercised) would suddenly tilt my whole portfolio towards IT and Mindtree.

    For the first time in my life, a stock would beat (as percentage holding) reliance in my portfolio.

  • Deepak Shenoy says:

    >himanav: Firstly thanks for the comments! And second, I wish you all the best with teh listing! I hope you are able to get a good listing price and a great future.

    Seven times! My goodness – sounds like people have taken loans to buy the Employee quota!

    From the allotment basis it seems like you’ll get 1/4th what you bid for, and any refunds by the 10th.

    And well done on exercising those options. Otherwise the company would end up paying FBT on hte options that they might have charged you later! (Btw, you might want to tell your colleagues to exercise all vested options before March 31)

    Lastly, do ask your financial people what is the impact of unvested employee ESOPs (which will vest later) on the financial performance, since there is FBT payable on the difference between the grant price and exercise price.

    If Mindtree stock prices go very high, then the FBT payable will increase, and if they can’t charge that to the employees hands, the earnings will drop. In Mindtree’s case this will be significant if prices corss Rs. 1000.

  • himanav says:

    >Deepak,
    I read your post of FBT impact on ESOPs. FBT on ESOPS don’t make a good lot of sense. I think we would get a clearer picture once it is clarified on which amount and how the FBT would be charged. The other day I was watching a interview with FM on CNBC, and FM was non-commital on how ESOPS would be taxed for the purpose of FBT. My assumption is the formula would be different than what is currently being mentioned by media.

    But if the formula is what is currently being mentioned in the media then for companies MindTree, which issued ESOPS way back (6 years) at 2/- per ESOP, the impact would be not good. Though the burden of ESOP FBT lies with employer, I have a feeling employer would pass on the burden to the employees. I don’t think our finance department would comment on anything till they fully understand how FBT is calculated on ESOPS.

    I exercised the ESOPS way back to avoid capital gains. Another reason was MindTree issued a interim dividend and I didn’t want to miss out on it.

    Yes the demat allocation, for employees and others also, has been completed. I received the refund through ECS 3 days back. The listing is tomorrow (7th march).

    Actually more than the FBT I was worried about the MAT that would apply to MindTree.

    [disclaimer: I am a mindtree employee as well as MindTree shareholder. I have vested interest in MindTree and anyone reading my comments should do the due diligence and verify facts stated above before acting on them.]

  • Deepak Shenoy says:

    >himanav: Good going. I think MAT is a non issue for companies like Mindtree. Firstly, Mindtree must be having branches in other countries (and therefore paying tax there) – the DTA (double taxation avoidance) agreements we have will ensure they can set off MAT against that tax.

    Secondly, MAT is a deferred tax meaning they can take credit for tax paid now in the next seven years.

    Thirdly, Mindtree is using some of the proceeds to get into an SEZ so further projects will not get taxed.

  • rahuldar says:

    >hi deepak,
    best company but i have a problem i was apply for an ipo of this company and i don’t got allotment or refund . what can i do ?
    +919414956938
    neeraj jain
    from jaipur

  • Deepak Shenoy says:

    >neeraj: Call up mondkar computer at http://mondkarcomputers.com/content2.html, and get the status of your refund and such. If they delay you can then write to SEBI and put a case against them too.

  • Raj says:

    >Deepak, I applied and have not heard back from Mondkar, two emails and no response so far. I have also tried calling them but couldnt get through.

    The website for IPO allocation gives this result:
    Microsoft OLE DB Provider for ODBC Drivers error ‘80040e37’

    [Microsoft][ODBC Visual FoxPro Driver]File ‘webquery.dbf’ does not exist.

    /iposearch.asp, line 167

    It is a shame for a technology company that they had to chose someone like Mondkar’ site.

    How do I complain to SEBI? Is there a form that you can point to. I know it is a basic question but SEBI’ site is too confusing.

    Thanks
    Raj

  • Deepak Shenoy says:

    >Raj, you can write to SEBI at http://www.sebi.gov.in/Index.jsp?contentDisp=Feedback.

    They have a feedback form, or you can write/call them.

    With your investor query, I think you should write or email the top heads at Mindtree about this. Send your details (like application number etc.) and tell them that a small investor like you has got a very bad response from Mondkar. And try calling mondkar – nobody in India responds to emails I have noticed.

    – Deepak

  • Anonymous says:

    >I too am facing a problem in receiving my refund and the amount is close to a lakh. As a small time investor, it has hit me real hard.

    What happens once you lodge a complaint with SEBI? Am I required to take the matter up with a court and hire a lawyer, or would SEBI handle everything and ensure that I receive the refund?

    Kindly advise.

  • Mahesh says:

    >Mindtree IPO refund not received till date. Guys this Mondkar Computers is a compnay of anti social elements. Their staff are using vulgar language over the phone if you ask for your refund. Even the owner of Mondkar Computers use rough language.. This is really a matter of shame for Mindtree Corporation that they are using customer’s money in an illegal way.

  • Suresh Patel says:

    >Even I have not received my refund from Mondkar Computers. Mahesh even I faced the same thing, owner of Mondkar Computer was talking like a Bombay’s mafia.. even their staff told me over the phone.. do it whatever you want to do we will not give your refund. No one is picking up my phone

  • Deepak Shenoy says:

    >Please lodge your complaint at:
    http://investor.sebi.gov.in/types%20of%20grievances.htm

    Specifically for refunds, this is the form:

    http://www.sebi.gov.in/Complaint1.jsp

    Please give complete details of how you contacted Mondkar and are resorting to a SEBI complaint.

    Mondkar has new mobile numbers also available on their website. As of today it is:

    Please call on the numbers during the business hours 10.30 AM to 1.00 PM & 1.30 PM to 5.30 PM
    Mobile nos. 9819404948, 9819405997, 9819405641, 9819405335, 9819404961, 9819405579, 9819404903, 9819404810, 9819404768
    Tel nos. : 2820 7201, 2820 7203-05
    Fax nos. : 2820 7207