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Mphasis BFL (MPHL)
Technology
Outlook bleak, valuations rich; cut estimates and reiterate SELL. We cut our
lower-than-consensus FY2013E (fiscal year ending October 2012) EPS estimate for
Mphasis further to Rs30 from Rs36. Revenue visibility is poor given sustained weakness
in HP enterprise segment (~60% of revenues) and increased macro uncertainty. In
addition, there are no obvious margin levers despite margins having corrected
substantially in the recent quarters. Cut our end-October 2012E TP to Rs300 (from
Rs360). SELL.
Cut our estimates and target price
Exhibit 1 depicts the revision in our FY2012/13E (we define year-ending October 2011 as FY2012)
estimate for Mphasis. Poor revenue growth visibility from the large HP enterprise segment (~60%
of revenues) and increased macro uncertainty drives a 1.7% and 5.7% cut in our FY2012E and
FY2013E US$ revenue estimates, respectively despite factoring in revenue uplift from the recent
Wyde consolidation. Reported one-offs in 3QFY12 drive a 5% increase in FY2012E EPS estimate to
Rs38.6 but we cut our EPS estimate for FY2013E to Rs30 from Rs36, driven by cut in OPM
estimates in addition to lowered revenue forecast. We reiterate our SELL rating on the stock with a
revised end-October 2012 target price of Rs300/share (from Rs360), implying a PE multiple of 10X.
Fundamentals have weakened substantially
Mphasis’ revenue/ OPM performance has been weak for the past few quarters. Yoy revenue
growth has tapered down to sub-6% and the company may report a yoy decline in US$ revenues
in the next quarter. More importantly, margins have fallen off a cliff – adjusted OPM of 14% for
the July 2011 quarter compares poorly with 23.4% reported in July 2010 and even poorer to the
peak of 28.5% hit in April 2009 quarter. In fact, we do not adjust any prior period reported
EBITDA margin levels for this comparison. Now, the costs the company is reversing in recent
quarters must have been accrued in one of the prior quarters implying that OPM for earlier
quarters was under-stated. In this light, the fall in margins is even sharper.
Outlook is bleak and valuations rich; SELL
Growth from the HP channel has slowed down considerably owing to weakness in the HP
Enterprise segment which contributes a bulk of Mphasis’ HP channel revenues. The management
has indicated a subdued revenue outlook from this segment going forward. Burden of revenue
growth, hence, falls on the non-HP Enterprise business and direct channel business. These two
contribute ~40% to Mphasis’ revenues. In this light our forecast organic revenue growth of 9%
yoy in FY2012E, implying nearly 23% yoy growth from the two ‘growth’ channels, may not be
conservative. Margin uplift, in the absence of revenue growth, will be difficult to come by given
the lack of any obvious levers. Valuations at >12X FY2013E EPS are expensive. SELL.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mphasis BFL (MPHL)
Technology
Outlook bleak, valuations rich; cut estimates and reiterate SELL. We cut our
lower-than-consensus FY2013E (fiscal year ending October 2012) EPS estimate for
Mphasis further to Rs30 from Rs36. Revenue visibility is poor given sustained weakness
in HP enterprise segment (~60% of revenues) and increased macro uncertainty. In
addition, there are no obvious margin levers despite margins having corrected
substantially in the recent quarters. Cut our end-October 2012E TP to Rs300 (from
Rs360). SELL.
Cut our estimates and target price
Exhibit 1 depicts the revision in our FY2012/13E (we define year-ending October 2011 as FY2012)
estimate for Mphasis. Poor revenue growth visibility from the large HP enterprise segment (~60%
of revenues) and increased macro uncertainty drives a 1.7% and 5.7% cut in our FY2012E and
FY2013E US$ revenue estimates, respectively despite factoring in revenue uplift from the recent
Wyde consolidation. Reported one-offs in 3QFY12 drive a 5% increase in FY2012E EPS estimate to
Rs38.6 but we cut our EPS estimate for FY2013E to Rs30 from Rs36, driven by cut in OPM
estimates in addition to lowered revenue forecast. We reiterate our SELL rating on the stock with a
revised end-October 2012 target price of Rs300/share (from Rs360), implying a PE multiple of 10X.
Fundamentals have weakened substantially
Mphasis’ revenue/ OPM performance has been weak for the past few quarters. Yoy revenue
growth has tapered down to sub-6% and the company may report a yoy decline in US$ revenues
in the next quarter. More importantly, margins have fallen off a cliff – adjusted OPM of 14% for
the July 2011 quarter compares poorly with 23.4% reported in July 2010 and even poorer to the
peak of 28.5% hit in April 2009 quarter. In fact, we do not adjust any prior period reported
EBITDA margin levels for this comparison. Now, the costs the company is reversing in recent
quarters must have been accrued in one of the prior quarters implying that OPM for earlier
quarters was under-stated. In this light, the fall in margins is even sharper.
Outlook is bleak and valuations rich; SELL
Growth from the HP channel has slowed down considerably owing to weakness in the HP
Enterprise segment which contributes a bulk of Mphasis’ HP channel revenues. The management
has indicated a subdued revenue outlook from this segment going forward. Burden of revenue
growth, hence, falls on the non-HP Enterprise business and direct channel business. These two
contribute ~40% to Mphasis’ revenues. In this light our forecast organic revenue growth of 9%
yoy in FY2012E, implying nearly 23% yoy growth from the two ‘growth’ channels, may not be
conservative. Margin uplift, in the absence of revenue growth, will be difficult to come by given
the lack of any obvious levers. Valuations at >12X FY2013E EPS are expensive. SELL.
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