Buy MphasiS recommends Nomura research

Direct play on MNC offshoring
 Best play on MNC offshoring strength
Accenture and Cap Gemini increased their global delivery headcount
proportion by 12% and 6%, respectively, over the past six quarters,
according to company filings. We see a similar push at HP to save
market share in impending deal renegotiations and on client pressure
to cut the cost of ownership. An 8% offshore shift at HP, even over a
two-year duration, implies some US$1bn in incremental revenue for
Mphasis — near doubling Mphasis’s FY10F revenue of US$1.1bn.
We build in incremental revenue of US$0.6bn and a revenue CAGR of
24.5% over FY10-12F.
 Expect strong-near term volume traction
We anticipate near-term volume traction on: 1) an ITO headcount
increase of 15% q-q in 3Q FY10 and open positions for another 9.6%
headcount addition; 2) 2,000 open positions in Apps (13.7% of
incremental headcount); 3) utilisation scope after 11ppt and 8ppt
declines in Apps and ITO utilization over the past three quarters; and
4) return to growth in BPO.
 Pricing-cut recurrence concerns look exaggerated
We believe Mphasis’s organic pricing across service lines — ITO
(US$19 per hr), BPO (US$ 7 per hr) and Apps (US$20 per hr) — is
already lower than the market and see concerns about further pricingcuts
as overdone. We believe significant pricing cuts from current
levels would have transfer pricing implications which HP would rather
avoid getting into. Also, current pricing levels should reduce internal
reservations at HP regarding offshoring work to Mphasis.
 BUY reiterated; top mid-cap IT pick
We reiterate BUY and roll forward our price target basis (14x one-year
forward earnings) for a new price target of Rs810 (previous Rs760).
Our PT basis represents a 30% discount to our target multiple for Infosys.