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MphasiS
4QFY10 – Volumes drive growth; maintain Buy
Strong volume growth. MphasiS saw 5% volume growth qoq –
the ITO division registered ~6.5% growth, mainly due to 7.7%
volume growth; Applications saw 5.8% growth (4.7% volume
growth). We retain our price target of `780 and reiterate Buy.
Higher net profit due to high forex gains, lower tax expense.
Hedging-gain adjustment in revenue of `272m inflated the overall
revenue. Tax rate was 9.6% of PBT, and MphasiS saw a forex gain
of `130m, which boosted its profits (up 4.7% qoq to `2.84bn).
Margins decrease sequentially. EBITDA margin decreased 88bp
qoq owing to higher SG&A costs. Onsite revenue mix rose 118bp
to 33.8%, leading to a margin dip.
Key observations. Growth drivers were the Asia-Pacific market
(25.6% qoq growth) and Telecoms (53.3%). Management spoke of
stability in billing rates. However, further billing-rate cuts cannot be
ruled out and depend on the company’s level of business with HP.
Change in estimates. We raise our FY11e and FY12e earnings
1.8% and 1.6% respectively, factoring in better revenue visibility
due to traction in the top accounts. Risks: i) Pricing rate cuts –
More-than-expected rate cuts would be detrimental to our earnings
estimates; ii) HP has a 100% subsidiary in India that offers services
similar to MphasiS. The latter has to compete with HP India to
secure in-house business.
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