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Initiating Coverage report on MphasiS Ltd.
MphasiS, being the 6th Indian IT company to clock $1bn revenues, is a leading provider of applications (Apps), infrastructure (ITO) and BPO services. The company was initially acquired by Electronic Data Systems (EDS) in 2006, which later merged with HP in 2008, qualifying MphasiS as HP's subsidiary.
The company employs 38000+ professionals, serving 190 clients in BFSI, technology, manufacturing and telecom industries, across the globe.
Executive Summary
· Restructuring efforts for sustaining growth
MphasiS’ dependence on the HP channel is significant, but the management is actively pursuing growth through the direct channel. In this regard, MphasiS has already engaged Boston Consulting Group (BCG) to help pilot the company through restructuring efforts aimed at capturing higher than market growth rates.
· Value unlocking through meaningful M&A activity
The company enjoys a strong cash position with negligible debt on books. Management has expressed eagerness in closing service offerings gaps through acquisitions that may contribute to the firm’s domain expertise in select verticals, going forward.
· Improved HP-margins on rate card negotiations
With increased confidence in direct channel, MphasiS has been able to renegotiate HP-business terms, from “cost+margins” to “rate-card scenario”, enabling the company to appropriate cost-optimisations. Thus, unlocking significant value linked to ~30% of its topline.
· Affiliation with HP affords brand-projection on a global-scale
Co-branding MphasiS as an HP affiliate is a significant intangible for the company, giving it an instant global recognition, a major determinant for direct-channel success.
Valuations
At CMP of Rs617.4, the stock is trading at 12.8x FY12E earnings. Considering the growth opportunities and robust economic scenario, we initiate coverage with 'buy' recommendation on the stock, arriving at a target price of Rs710 for one year period, subject to change.
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