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Mphasis reported a sharp fall in 1Q11 US dollar revenues (-8.5% qoq) and EBITDA margin exone
offs (-475bp). Given margin headwinds and limited visibility on HP channel growth, we lower
our FY11/12F US dollar revenues and EPS by 13%/16% and 26%/27%. We reiterate Hold after
the stock's 29% decline post the 1Q results.
1Q11 results: significant negative surprises on both top-line and margins
Consolidated revenues (ex-FX) were down 7.2% qoq to US$269m (RBS est: US$306m).
Reported revenues in rupee terms were down 8.3% to Rs12.3bn, impacted by lower billing days
(-3.5%), one-time revenues booked in 4Q10 (-3.0%), rate negotiations within the HP channel (-
1.0%) and FX (-0.7%). HP channel revenues were down 9.3% qoq to US$185m (ex-FX). Non-HP
revenues were down 2.2% qoq to US$85m (ex-FX). The reported EBITDA margin was down
294bp to 20.9% (RBS est: 23.4%), driven by the sharp decline in revenues and lower FX gains.
Excluding the one-time writebacks, the EBITDA margin was down 475bp qoq to 17.4%, the
lowest for 11 quarters. Reported PAT was down 20.2% qoq to Rs2.27bn (RBS est: Rs2.82bn).
Excluding one-offs, PAT was down 28.5% qoq.
Rising uncertainty on HP channel revenues; several margin headwinds ahead
Management indicated that momentum in revenue growth from the HP channel (68% of
revenues) is slowing. Non-HP business does not have the critical mass to move the needle much
in the near term, in our view. We cut our FY11/12 US dollar revenues forecasts (ex-FX) by
13%/16%. We also see significant margin pressures – the base effect of one-off cost writebacks;
and planned salary hikes in 3Q for 90% of its workforce. We reduce our FY11/12 forecasts by
383bp/345bp on the EBITDA margin and by 26%/27% on EPS.
With the sharp decline in the stock, we maintain Hold
On the 26%/27%/26% downgrades in our FY11/12/13 EPS estimates, we cut our target price to
Rs450 (from Rs690), derived by applying a PE of c11x to four quarters’ EPS ending April 2013F
(vs c12x earlier). We raise the discount of our target PE from c40% to the c50% to the industrybenchmark
Infosys, building in a likely PE de-rating on worsening fundamentals. We believe the
29% correction in MphasiS’s share price since the results largely factors in the likely downgrades
in street and our estimates and reiterate Hold. The key upside risk to our target price is a
corporate event such as an open offer for the company from its parent HP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mphasis reported a sharp fall in 1Q11 US dollar revenues (-8.5% qoq) and EBITDA margin exone
offs (-475bp). Given margin headwinds and limited visibility on HP channel growth, we lower
our FY11/12F US dollar revenues and EPS by 13%/16% and 26%/27%. We reiterate Hold after
the stock's 29% decline post the 1Q results.
1Q11 results: significant negative surprises on both top-line and margins
Consolidated revenues (ex-FX) were down 7.2% qoq to US$269m (RBS est: US$306m).
Reported revenues in rupee terms were down 8.3% to Rs12.3bn, impacted by lower billing days
(-3.5%), one-time revenues booked in 4Q10 (-3.0%), rate negotiations within the HP channel (-
1.0%) and FX (-0.7%). HP channel revenues were down 9.3% qoq to US$185m (ex-FX). Non-HP
revenues were down 2.2% qoq to US$85m (ex-FX). The reported EBITDA margin was down
294bp to 20.9% (RBS est: 23.4%), driven by the sharp decline in revenues and lower FX gains.
Excluding the one-time writebacks, the EBITDA margin was down 475bp qoq to 17.4%, the
lowest for 11 quarters. Reported PAT was down 20.2% qoq to Rs2.27bn (RBS est: Rs2.82bn).
Excluding one-offs, PAT was down 28.5% qoq.
Rising uncertainty on HP channel revenues; several margin headwinds ahead
Management indicated that momentum in revenue growth from the HP channel (68% of
revenues) is slowing. Non-HP business does not have the critical mass to move the needle much
in the near term, in our view. We cut our FY11/12 US dollar revenues forecasts (ex-FX) by
13%/16%. We also see significant margin pressures – the base effect of one-off cost writebacks;
and planned salary hikes in 3Q for 90% of its workforce. We reduce our FY11/12 forecasts by
383bp/345bp on the EBITDA margin and by 26%/27% on EPS.
With the sharp decline in the stock, we maintain Hold
On the 26%/27%/26% downgrades in our FY11/12/13 EPS estimates, we cut our target price to
Rs450 (from Rs690), derived by applying a PE of c11x to four quarters’ EPS ending April 2013F
(vs c12x earlier). We raise the discount of our target PE from c40% to the c50% to the industrybenchmark
Infosys, building in a likely PE de-rating on worsening fundamentals. We believe the
29% correction in MphasiS’s share price since the results largely factors in the likely downgrades
in street and our estimates and reiterate Hold. The key upside risk to our target price is a
corporate event such as an open offer for the company from its parent HP.
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