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MphasiS Ltd.
1Q results worse than feared; Underperform
„Cut estimates 25%, reduce PO; Retain Underperform
Post disappointing 1Q where earnings missed BofAMLe by 21% on back of 12%
revenue miss and ~600bps margin miss, we cut FY11e and FY12e by ~25% each
and cut PO to Rs490. Not only did results disappoint, management stance on
cutting down of critical disclosures such as billing rates / revenue segmentation
during a weak quarter likely to weigh on valuations. Revenue visibility remains a
concern as reflected by QoQ decline in open billable positions over last three
quarters. Stock likely to languish. Retain Underperform.
1Q results more disappointing than expected
While we were concerned on potential pricing cuts from top client HP, 10% QoQ
decline in revs from HP was much sharper and disappointing. Management
attributed declines to lower working days during 1Q, pricing cuts from HP and non
recognition of milestone revs (not highlighted by company earlier) reported in 4Q.
While we were concerned on risk to margins, ~600bps decline QoQ in recurring
EBIT margins was sharper and unanticipated. Reported margins declined by
~300bps and factors in one time reversal of provisions no longer required.
Disclosure levels also reduced
1Q also reflected poorly on consistency of disclosure levels. Pricing details have
not being provided and revenue segmentation provided on vertical basis vs
service lines, inconsistent with practice followed since last 2-3 years.
Revenue visibility remains a concern
Number of open billable positions in applications segment declined from 1600
(4Q) to 1000 during the quarter and in Infra mgt (ITO) from 800 to 470, indicating
lower revenue visibility level on two key segments. Earnings likely to decline 22%
in FY11E driven by muted revenue growth, margin declines and jump in tax rates.
Stock likely to languish
Post disappointing 1Q where earnings missed BofAMLe by 21% on back of 12%
revenue miss and 600bps recurring EBIT margin decline QoQ, we cut FY11e and
FY12e by ~25% and cut PO to Rs490. While results disappointed, management
stance on cutting down on critical disclosures such as billing rates / revenue
segmentation during a weak quarter will weigh on valuations. Revenue visibility
remains a concern as reflected by QoQ decline in open billable positions over last
three quarters. Stock likely to languish. Retain Underperform.
1Q: significant miss
1Q results were disappointing. Revenues declined 8% QoQ, missing BofAMLe by
12% and were driven by 10% decline in HP revenues and 3% decline in Non HP
revenues.
Management attributed revenue declines to lower working days (~3.5% decline),
pricing cuts (~1%) and non recurrence of mile stone revenues reported in 4Q (~3%)
EBIT margins reset to lower levels
While we were concerned on margin sustenance, a sharp fall in 1Q was not
anticipated. Recurring margins declined 600bps QoQ driven by revenue decline,
pricing cuts and investment in SG&A.
Reported margins declined by ~300bps to 18% and factors in one time reversal of
provisions no longer required.
Given management focus now to invest in ramping non HP business, margins
levels likely to remain subdued at these levels.
Cut down in disclosure levels to weigh on valuations
During the quarter management also cut down on quarterly disclosure levels. It
has stopped disclosing billing rates across key service lines (applications, infra
management and BPO) and have also changed revenue segmentation making
quarterly comparisons difficult.
While management attributed the change to transformation program being
undertaken by the company, where it now focuses on verticals rather than
horizontals, a drastic change in disclosures during a quarter where margins
collapsed is surprising.
Given concerns on potential pricing cuts from HP, non disclosure of billing rate
likely to impact on PE ratings for the company
Price objective basis & risk
MphasiS Ltd (MPSSF)
Our PO of Rs490 is at 11x FY12E, at discount to mid-tier peers and factors in
potential de-rating given the risk to pricing from HP, its largest customer.
Risks: Potential upside to volumes from HP. Industry risks: a worse-thanexpected slowdown in the United States, sharper-than-expected INR appreciation
and increasing competition.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MphasiS Ltd.
1Q results worse than feared; Underperform
„Cut estimates 25%, reduce PO; Retain Underperform
Post disappointing 1Q where earnings missed BofAMLe by 21% on back of 12%
revenue miss and ~600bps margin miss, we cut FY11e and FY12e by ~25% each
and cut PO to Rs490. Not only did results disappoint, management stance on
cutting down of critical disclosures such as billing rates / revenue segmentation
during a weak quarter likely to weigh on valuations. Revenue visibility remains a
concern as reflected by QoQ decline in open billable positions over last three
quarters. Stock likely to languish. Retain Underperform.
1Q results more disappointing than expected
While we were concerned on potential pricing cuts from top client HP, 10% QoQ
decline in revs from HP was much sharper and disappointing. Management
attributed declines to lower working days during 1Q, pricing cuts from HP and non
recognition of milestone revs (not highlighted by company earlier) reported in 4Q.
While we were concerned on risk to margins, ~600bps decline QoQ in recurring
EBIT margins was sharper and unanticipated. Reported margins declined by
~300bps and factors in one time reversal of provisions no longer required.
Disclosure levels also reduced
1Q also reflected poorly on consistency of disclosure levels. Pricing details have
not being provided and revenue segmentation provided on vertical basis vs
service lines, inconsistent with practice followed since last 2-3 years.
Revenue visibility remains a concern
Number of open billable positions in applications segment declined from 1600
(4Q) to 1000 during the quarter and in Infra mgt (ITO) from 800 to 470, indicating
lower revenue visibility level on two key segments. Earnings likely to decline 22%
in FY11E driven by muted revenue growth, margin declines and jump in tax rates.
Stock likely to languish
Post disappointing 1Q where earnings missed BofAMLe by 21% on back of 12%
revenue miss and 600bps recurring EBIT margin decline QoQ, we cut FY11e and
FY12e by ~25% and cut PO to Rs490. While results disappointed, management
stance on cutting down on critical disclosures such as billing rates / revenue
segmentation during a weak quarter will weigh on valuations. Revenue visibility
remains a concern as reflected by QoQ decline in open billable positions over last
three quarters. Stock likely to languish. Retain Underperform.
1Q: significant miss
1Q results were disappointing. Revenues declined 8% QoQ, missing BofAMLe by
12% and were driven by 10% decline in HP revenues and 3% decline in Non HP
revenues.
Management attributed revenue declines to lower working days (~3.5% decline),
pricing cuts (~1%) and non recurrence of mile stone revenues reported in 4Q (~3%)
EBIT margins reset to lower levels
While we were concerned on margin sustenance, a sharp fall in 1Q was not
anticipated. Recurring margins declined 600bps QoQ driven by revenue decline,
pricing cuts and investment in SG&A.
Reported margins declined by ~300bps to 18% and factors in one time reversal of
provisions no longer required.
Given management focus now to invest in ramping non HP business, margins
levels likely to remain subdued at these levels.
Cut down in disclosure levels to weigh on valuations
During the quarter management also cut down on quarterly disclosure levels. It
has stopped disclosing billing rates across key service lines (applications, infra
management and BPO) and have also changed revenue segmentation making
quarterly comparisons difficult.
While management attributed the change to transformation program being
undertaken by the company, where it now focuses on verticals rather than
horizontals, a drastic change in disclosures during a quarter where margins
collapsed is surprising.
Given concerns on potential pricing cuts from HP, non disclosure of billing rate
likely to impact on PE ratings for the company
Price objective basis & risk
MphasiS Ltd (MPSSF)
Our PO of Rs490 is at 11x FY12E, at discount to mid-tier peers and factors in
potential de-rating given the risk to pricing from HP, its largest customer.
Risks: Potential upside to volumes from HP. Industry risks: a worse-thanexpected slowdown in the United States, sharper-than-expected INR appreciation
and increasing competition.
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