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Mphasis’ Q1FY13 numbers fell short of expectations. While revenue
declined 3% QoQ at USD266mn, net profit came in flat QoQ at INR1.84bn.
HP revenue channel continues to trend down (4% QoQ decline), but
direct business growth posted healthy traction (9% QoQ). Operating
margin (EBITDA) continued to inch up with 60bps improvement to 18.5%,
in line with expectation. We note that due to cash flow hedge accounting,
the company does not benefit from weaker rupee in the same quarter.
While the weak result does not impact our earnings estimate, the strong
stock performance over the past three months (up 40%) post our upgrade
to ‘BUY’ does not leave any upside. Hence, we downgrade our
recommendation to ‘HOLD’ with target price of INR390.
HP ES business decline impact to be limited
Mphasis has gained traction in HP non‐ES businesses—printing and imaging, R&D,
technology consulting (SI)—leading to stronger order book. While in Q1FY13, revenue
from this segment was impacted due to delays, for the full year it is expected to
contribute USD75mn‐80mn. Further, significant sales efforts to grow direct business
are already seeing healthy trend with the past two quarters’ CQGR close to 10%. We
expect this to offset the weakness in the HP ES segment (we have factored 10% decline
in FY13) that continues to be impacted due to market share loss by parent HP.
Margin turnaround expected to sustain
The company’s operating margins have improved 310bps to 18.5% over the past two
quarters. This was led by cost and efficiency related initiatives, which will continue. We
further note that Mphasis will benefit from the weak rupee with a lag and hence we
expect EBITDA margin to sustain over 18.5% going forward.
Outlook and valuations: No upside left: downgrade to ‘HOLD’
In our note titled Favourable risk‐reward, dated December 2, 2011, we had upgraded
the stock to ‘BUY’. Post that, the stock has rallied 40%, also supported by the
anticipated buy‐back and delisting related news, leading to P/E expansion to 11.8x
FY13E. At CMP of INR434, we believe there is no upside left. Hence, we are
downgrading our recommendation to ‘HOLD’ from ‘BUY’ with target price of INR390.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mphasis’ Q1FY13 numbers fell short of expectations. While revenue
declined 3% QoQ at USD266mn, net profit came in flat QoQ at INR1.84bn.
HP revenue channel continues to trend down (4% QoQ decline), but
direct business growth posted healthy traction (9% QoQ). Operating
margin (EBITDA) continued to inch up with 60bps improvement to 18.5%,
in line with expectation. We note that due to cash flow hedge accounting,
the company does not benefit from weaker rupee in the same quarter.
While the weak result does not impact our earnings estimate, the strong
stock performance over the past three months (up 40%) post our upgrade
to ‘BUY’ does not leave any upside. Hence, we downgrade our
recommendation to ‘HOLD’ with target price of INR390.
HP ES business decline impact to be limited
Mphasis has gained traction in HP non‐ES businesses—printing and imaging, R&D,
technology consulting (SI)—leading to stronger order book. While in Q1FY13, revenue
from this segment was impacted due to delays, for the full year it is expected to
contribute USD75mn‐80mn. Further, significant sales efforts to grow direct business
are already seeing healthy trend with the past two quarters’ CQGR close to 10%. We
expect this to offset the weakness in the HP ES segment (we have factored 10% decline
in FY13) that continues to be impacted due to market share loss by parent HP.
Margin turnaround expected to sustain
The company’s operating margins have improved 310bps to 18.5% over the past two
quarters. This was led by cost and efficiency related initiatives, which will continue. We
further note that Mphasis will benefit from the weak rupee with a lag and hence we
expect EBITDA margin to sustain over 18.5% going forward.
Outlook and valuations: No upside left: downgrade to ‘HOLD’
In our note titled Favourable risk‐reward, dated December 2, 2011, we had upgraded
the stock to ‘BUY’. Post that, the stock has rallied 40%, also supported by the
anticipated buy‐back and delisting related news, leading to P/E expansion to 11.8x
FY13E. At CMP of INR434, we believe there is no upside left. Hence, we are
downgrading our recommendation to ‘HOLD’ from ‘BUY’ with target price of INR390.
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