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MphasiS Ltd. — Downside risk to margins
FY11: Year of investments; margins to be under pressure
MphasiS in its analyst meet today, unveiled its long term growth strategy. As
highlighted in our note, management now expects margin to be under pressure
during FY11(Oct end) given higher investments in SG&A. Key highlights 1)
Intends to achieve a well balanced growth between HP and direct business 2)
invest in emerging economies for growth and 3) incubate new businesses to drive
future growth. We retain Underperform rating given our view that earnings growth
likely to be muted over next two years and likely risk to margins from potential
pricing cuts from top client HP and higher SG&A investments.
Grow share of Non HP business, invest in new geographies
Management now intends to aggressively grow share of direct (Non HP) business
through investment in sales & marketing and inorganic initiatives. It is now open
to acquire companies in USD100mn range (vsUSD50mn) and plans to invest in
emerging geographies such as India, Srilanka & Indonesia. It also plans to invest
in IP and is incubating solutions in the area of hospital administration system,
payment solutions, healthcare administration, and product engineering services. It
has also restructured its organization to create a flat reporting structure with 16
business/geography heads reporting to CEO as against eight earlier.
Margins likely to be under pressure
During the meet management highlighted that it would be forming a separate
sales team to target Non HP business (30% revs) and would be investing in
SG&A during the year. Consequently it believes EBIT margin could trend down
from current range of 20-22% to 18-20% during the year. We see downside risk to
FY11 (Oct end) estimates.
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