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UBS Investment Research
MphasiS Limited
Poor 1Q clouds earnings visibility
„ 1Q disappoints on both volumes and margins
MphasiS 1QFY11 revenue declined 8.3% QoQ to Rs12.3bn, 11% lower than
consensus and UBS’s estimate. The company attributed this decline to the HP
shutdown (3.5% impact) and lower pricing (1% impact). Net profit at Rs2.3bn
(down 20% QoQ) was 17% below UBS and consensus estimates. We had expected
pricing decline and seasonality, but we were surprised by segments such as
application development (-12% QoQ) and maintenance (-6.5%) where other Indian
vendors have recorded a robust pick-up.
„ Adjusted operating margins drop 650bp QoQ
EBITDA margin was down 290bps to 20.9% versus our estimate of 23.7%.
Excluding one-offs (provision write-backs), the EBITDA margin stood at 17.4%,
down 650bp QoQ. Adjusting for write-backs, EBITDA was at Rs2.1bn, 35%
below our estimate of Rs3.3bn.
„ Reduced disclosure clouds visibility on future growth predications
MphasiS has changed its reporting structure and has ceased reporting metrics such
as billing rates, geography-wise revenue etc. We believe such metrics are essential
for tracking the health of the business model. The decline in disclosure levels limits
visibility for forecasting revenue and earnings growth for MphasiS, in our view.
„ Valuation: disconnect between MphasiS results and industry trends
We observe a disconnect between MphasiS’s 1Q results and the trends for offshore
IT services over the past few quarters and, as a result, believe that HP (62%
stakeholder) could be looking to consolidate its holding in the company. We are in
the process of reviewing our model.
Q MphasiS Limited
MphasiS, a unit of Hewlett Packard (HP), was formed in 2000 with the merger
of BFL Software and US-based MphasiS Corporation. HP, through EDS, holds a
61% stake in the company. It had more than 36,000 employees and posted
US$878m revenue in FY09. MphasiS offers application development and
maintenance, infrastructure management, and IT-enabled services, including
business process outsourcing. The company's customers are from financial
services, retail and manufacturing, telecom and media, healthcare, transport, and
utilities. It derives around 70% of revenue from the US.
Q Statement of Risk
A decline in IT Services spending could result in downward revision of our
earnings estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
MphasiS Limited
Poor 1Q clouds earnings visibility
„ 1Q disappoints on both volumes and margins
MphasiS 1QFY11 revenue declined 8.3% QoQ to Rs12.3bn, 11% lower than
consensus and UBS’s estimate. The company attributed this decline to the HP
shutdown (3.5% impact) and lower pricing (1% impact). Net profit at Rs2.3bn
(down 20% QoQ) was 17% below UBS and consensus estimates. We had expected
pricing decline and seasonality, but we were surprised by segments such as
application development (-12% QoQ) and maintenance (-6.5%) where other Indian
vendors have recorded a robust pick-up.
„ Adjusted operating margins drop 650bp QoQ
EBITDA margin was down 290bps to 20.9% versus our estimate of 23.7%.
Excluding one-offs (provision write-backs), the EBITDA margin stood at 17.4%,
down 650bp QoQ. Adjusting for write-backs, EBITDA was at Rs2.1bn, 35%
below our estimate of Rs3.3bn.
„ Reduced disclosure clouds visibility on future growth predications
MphasiS has changed its reporting structure and has ceased reporting metrics such
as billing rates, geography-wise revenue etc. We believe such metrics are essential
for tracking the health of the business model. The decline in disclosure levels limits
visibility for forecasting revenue and earnings growth for MphasiS, in our view.
„ Valuation: disconnect between MphasiS results and industry trends
We observe a disconnect between MphasiS’s 1Q results and the trends for offshore
IT services over the past few quarters and, as a result, believe that HP (62%
stakeholder) could be looking to consolidate its holding in the company. We are in
the process of reviewing our model.
Q MphasiS Limited
MphasiS, a unit of Hewlett Packard (HP), was formed in 2000 with the merger
of BFL Software and US-based MphasiS Corporation. HP, through EDS, holds a
61% stake in the company. It had more than 36,000 employees and posted
US$878m revenue in FY09. MphasiS offers application development and
maintenance, infrastructure management, and IT-enabled services, including
business process outsourcing. The company's customers are from financial
services, retail and manufacturing, telecom and media, healthcare, transport, and
utilities. It derives around 70% of revenue from the US.
Q Statement of Risk
A decline in IT Services spending could result in downward revision of our
earnings estimates.
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