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Mphasis (CMP: `609/ TP: `872/ Upside: 43%)
The company steered the pricing headwind from HP’s renegotiation exercise very
prudently by making up the cuts in application services with higher price points in
Infrastructure services. The major pricing review overhang is done and, going
forward, management expects a stable pricing arrangement with HP given that the
50% of rate card pricing will remain fixed and 50% will be market driven
Management is focused on enhancing the company’s growth trajectory in the
Non-HP business going forward. This initiative coupled with the effective rate card
implementation, which has witnessed cost optimisation, would see improved
operational performance for Mphasis going ahead.
Mphasis has strong cash position of `1,487cr as on July 2010, which would help it
to go for acquisitions of strategic fit in the size of US$50mn–$100mn annual
revenue run rate.
Considering the company’s parentage of one of the largest IT companies globally
(HP-EDS), driving rapid growth and bringing it closer to Top Tier status, we expect
Mphasis to be rerated from the FY2012E P/E of 10.0x that it is currently trading at.
We value the stock at 14.3x FY2012E EPS of `60.9 (at 35% discount to Infosys’
target PE of 22x and in line with target multiple for HCL Tech) and maintain our
Buy rating on the stock with a Target Price of `872.
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