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MphasiS
A poor show
Mphasis reported a sharp decline in 1Q11 US$ revenues (-8.5% qoq) and EBITDA
margin ex-one offs (-475bp). Slowing momentum in HP channel, seasonal
weakness, one-off revenues in 4Q10 were headwinds, in addition to pricing and
fx. We expect material earnings downgrades and the stock to react negatively.
Significant topline slippage driven by HP channel, seasonality and one-offs
! Mphasis reported a topline decline of 8.5% qoq to US$271m. Excluding hedging gains
reported in the topline, revenues were down 7.2% to US$269m (RBS est. US$306m).
Reported revenues in rupee terms were down 8.3% to Rs12.3bn.
! According to management, consolidated revenues were impacted by lower billing days (-
3.5%), one time revenues booked in 4Q10 (-3.0%), rate negotiations within HP channel (-
1.0%) and fx (-0.7%).
! We note that while seasonal weakness is understandable (though quantum is surprising,
given we did not see a similar impact in 1Q10), the one time revenues in 4Q10 were not
highlighted previously, and hence comes as a negative surprise.
! HP channel revenues were down 9.3% qoq to US$185m (excluding revenues from cash flow
hedges). Assuming that the pricing decline solely came from HP, we estimate a c1.5%
blended pricing declined for HP channel.
! Non-HP revenues were down 2.2% qoq to US$85m (excluding revenues from cash flow
hedges).
! Revenue decline was broadbased across verticals - Banking/Capital Markets and
IT/Communication/Entertainment revenues showed the highest decline by 10.6% and 8.4%
respectively.
Underlying margins were under significant stress qoq
! The sharp decline in revenues and lower hedging gains impacted margins. Utilization was
down 300bp in application services.
! Reported EBITDA margin was down 294bp to 20.9% (RBS est. 23.4%). Excluding the onetime writebacks, the EBITDA margins were down 475bp qoq to 17.4%, the lowest since Mar-
08.
! Reported PAT was down 20.2% qoq to Rs2.27bn (RBS est. Rs 2.82bn). Excluding the impact
of one time items, we estimate that PAT was down 28.5%.
We see significant downside to our and street estimates
! We continue believe revenue growth momentum from the HP channel is at risk, given the
sudden change in management focus towards building the non HP business.
! We see margins being under significant pressure assuming no further one-time cost
writebacks. Also, the company has given salary hikes to only 10% of its employee base, with
the remaining 90% to be given hikes in 3Q11.
! We see significant downside to our FY11 EPS estimates of Rs50.8, which are 3.6% below
consensus estimates. Given the poor 1Q11 show, potential margin headwinds and tax rates
set to rise, assuming STPI expiry from April 2011, there would be material downgrades to our
and street forecasts.
! We will review our rating and estimates post the analyst call tomorrow
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MphasiS
A poor show
Mphasis reported a sharp decline in 1Q11 US$ revenues (-8.5% qoq) and EBITDA
margin ex-one offs (-475bp). Slowing momentum in HP channel, seasonal
weakness, one-off revenues in 4Q10 were headwinds, in addition to pricing and
fx. We expect material earnings downgrades and the stock to react negatively.
Significant topline slippage driven by HP channel, seasonality and one-offs
! Mphasis reported a topline decline of 8.5% qoq to US$271m. Excluding hedging gains
reported in the topline, revenues were down 7.2% to US$269m (RBS est. US$306m).
Reported revenues in rupee terms were down 8.3% to Rs12.3bn.
! According to management, consolidated revenues were impacted by lower billing days (-
3.5%), one time revenues booked in 4Q10 (-3.0%), rate negotiations within HP channel (-
1.0%) and fx (-0.7%).
! We note that while seasonal weakness is understandable (though quantum is surprising,
given we did not see a similar impact in 1Q10), the one time revenues in 4Q10 were not
highlighted previously, and hence comes as a negative surprise.
! HP channel revenues were down 9.3% qoq to US$185m (excluding revenues from cash flow
hedges). Assuming that the pricing decline solely came from HP, we estimate a c1.5%
blended pricing declined for HP channel.
! Non-HP revenues were down 2.2% qoq to US$85m (excluding revenues from cash flow
hedges).
! Revenue decline was broadbased across verticals - Banking/Capital Markets and
IT/Communication/Entertainment revenues showed the highest decline by 10.6% and 8.4%
respectively.
Underlying margins were under significant stress qoq
! The sharp decline in revenues and lower hedging gains impacted margins. Utilization was
down 300bp in application services.
! Reported EBITDA margin was down 294bp to 20.9% (RBS est. 23.4%). Excluding the onetime writebacks, the EBITDA margins were down 475bp qoq to 17.4%, the lowest since Mar-
08.
! Reported PAT was down 20.2% qoq to Rs2.27bn (RBS est. Rs 2.82bn). Excluding the impact
of one time items, we estimate that PAT was down 28.5%.
We see significant downside to our and street estimates
! We continue believe revenue growth momentum from the HP channel is at risk, given the
sudden change in management focus towards building the non HP business.
! We see margins being under significant pressure assuming no further one-time cost
writebacks. Also, the company has given salary hikes to only 10% of its employee base, with
the remaining 90% to be given hikes in 3Q11.
! We see significant downside to our FY11 EPS estimates of Rs50.8, which are 3.6% below
consensus estimates. Given the poor 1Q11 show, potential margin headwinds and tax rates
set to rise, assuming STPI expiry from April 2011, there would be material downgrades to our
and street forecasts.
! We will review our rating and estimates post the analyst call tomorrow
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