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MPHASIS BFL LTD
RECOMMENDATION: REDUCE
TARGET PRICE: RS.458
FY11E P/E: 11.6X
Await better price points to become positive
q Mphasis has entered into a definitive agreement to acquire Wyde Corporation,
a software vendor in the insurance policy administration business.
Mphasis will hold a 100% equity stake in Wyde, post completion of
the transaction, which is subject to completion of customary conditions.
q We understand that, this furthers Mphasis' position in the mid-market insurance
segment in emerging economies. The IP and Platform expertise
of Wyde will complement the IT / BPO expertise of Mphasis in this vertical.
Wyde is the creator of Wynsure - an insurance policy administration
solution. Before this, in the insurance vertical, Mphasis had acquired
AIGSS (AIG Software Systems), the AIG captive center in India in 2009.
q However, the relatively small size of the target company may not make
any material change to the financials of Mphasis. Wyde had annual revenues
of about $30mn. Mphasis has not disclosed the actual cost of the
acquisition. We maintain our earnings estimates for FY11E at Rs.38.4 per
share. Our DCF based price target of Rs.458 results in a target FY11E PE of
Rs.11.9x.
q On the organic business side, the re-negotiations with HP on the rate
card were expected to conclude by the end of 2Q and will remain an
overhang. Thus, despite an encouraging macro scenario and expected
growth in the future quarters, we maintain our REDUCE rating. We expect
the stock to under-perform because of the lack of any triggers. We
will wait for better price points to turn positive on the stock based on
FY12 earnings. A potential buy-back offer / de-listing from HP can provide
upsides to the stock.
q A delayed recovery in user economies and a sharper-than-expected rupee
appreciation are key risks to our estimates.
Acquires Wyde Corporation
MphasiS has entered into a definitive agreement to acquire Wyde Corporation.
Wyde is an international software vendor and owns Wynsure - a leading Insurance
Policy Administration Solution. MphasiS will hold a 100% equity stake in Wyde, post
the closure of the deal, which is subject to completion of customary conditions.
Wyde is headquartered in Minneapolis, USA, with a R&D centre in France. The company
has over 200 employees, mainly domain experts. It has developed and deployed
Wynsure, a software platform, at many of the leading insurance carriers in
North America and Europe. The platform is a multi-language, multi-currency, software
that offers policy administration, claims and billing solutions across Life & Annuities
(L&A), disability, health, and Property & Casualty (P&C) businesses.
Wyde caters to a robust customer base which include Tier I as well as Mid-market
insurers across the US, France and Canada. The company has been rated as a Top
4 player by Gartner in its area of operations. The company has a strong presence in
emerging markets through an acquisition made in Vietnam. It is also strong in the
mid-market segment, which is the fastest growing segment in insurance, we believe.
Wyde has more than 25 customers and according to the management, there is no
overlap with any Mphasis customer. The top client contributes 18% to total revenues,
second 12% and the next three clients bring in 10% each.
Strategic rationale
Wyde has a strong presence in the fast growing emerging markets and is also predominantly
in the mid-market segment, which is also witnessing high growth rates.
Wyde's Wynsure platform complements MphasiS' current insurance practice by offering
customers a range of software, business consulting and professional services.
We understand that, the acquisition will extend MphasiS' insurance footprint in Life
& Annuities segment and strengthen its existing capability in the Property & Casualty
segment. Currently, Mphasis gets about 10% of revenues from the insurance vertical.
The overall insurance market is estimated to be about $32bn globally.
Mphasis has the BPO expertise and had acquired applications expertise through the
acquisition of AIGSS in 2009. This acquisition will now make Mphasis an integrated
service provider with added expertise in IP and platforms. It will be able to provide
integrated services in areas such as policy administration, claims and billing.
On the other hand, MphasiS will provide Wyde with access to new markets and
scale to provide implementation and integration services to clients.
The addition of Wynsure will help Mphasis in scaling up its non-linear revenues
which are important from the margins perspective. Also, this will help it in reducing
revenue dependence on its largest client, HP.
For Wyde, in addition to the license sales, revenue come in from the related services.
Implementation, integration and AMC revenues contribute more than twice
the license revenues and are sticky in nature. This provides more stability and
scalability to revenues.
Financials
Wyde has annual revenues of about $30mn. The company enjoys operating margins
of about 18%, with PBT of 19% and PAT of about 18%. The company has net cash
of about $10mn. However, Mphasis is acquiring Wyde net of its cash.
Out of the total revenues of about $30mn, about 27% - 30% came from license
revenues, about 6% - 8% came from AMCs and the remaining from related services.
The company expenses out all the R&D expenditure which it incurs every
year.
The company has not disclosed the acquisition cost except for the fact that it is an
all-cash deal. It has also indicated that, similar deals have happened at between
2.5x - 4x revenues (ex-cash).
Thus, if we assume similar valuations for Wyde, we believe that, the overall impact
on Mphasis' consolidated financials will be negligible. We, therefore, maintain our
earnings estimates. We expect FY11 EPS to be at Rs. 38.4.
Concerns
n A delayed recovery in major user economies may impact our projections.
n A sharp acceleration in rupee from the current levels may impact our earnings
estimates for the company.
n While strong parentage is a positive, uncertainty over future allocation of business
remains a concern for the market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MPHASIS BFL LTD
RECOMMENDATION: REDUCE
TARGET PRICE: RS.458
FY11E P/E: 11.6X
Await better price points to become positive
q Mphasis has entered into a definitive agreement to acquire Wyde Corporation,
a software vendor in the insurance policy administration business.
Mphasis will hold a 100% equity stake in Wyde, post completion of
the transaction, which is subject to completion of customary conditions.
q We understand that, this furthers Mphasis' position in the mid-market insurance
segment in emerging economies. The IP and Platform expertise
of Wyde will complement the IT / BPO expertise of Mphasis in this vertical.
Wyde is the creator of Wynsure - an insurance policy administration
solution. Before this, in the insurance vertical, Mphasis had acquired
AIGSS (AIG Software Systems), the AIG captive center in India in 2009.
q However, the relatively small size of the target company may not make
any material change to the financials of Mphasis. Wyde had annual revenues
of about $30mn. Mphasis has not disclosed the actual cost of the
acquisition. We maintain our earnings estimates for FY11E at Rs.38.4 per
share. Our DCF based price target of Rs.458 results in a target FY11E PE of
Rs.11.9x.
q On the organic business side, the re-negotiations with HP on the rate
card were expected to conclude by the end of 2Q and will remain an
overhang. Thus, despite an encouraging macro scenario and expected
growth in the future quarters, we maintain our REDUCE rating. We expect
the stock to under-perform because of the lack of any triggers. We
will wait for better price points to turn positive on the stock based on
FY12 earnings. A potential buy-back offer / de-listing from HP can provide
upsides to the stock.
q A delayed recovery in user economies and a sharper-than-expected rupee
appreciation are key risks to our estimates.
Acquires Wyde Corporation
MphasiS has entered into a definitive agreement to acquire Wyde Corporation.
Wyde is an international software vendor and owns Wynsure - a leading Insurance
Policy Administration Solution. MphasiS will hold a 100% equity stake in Wyde, post
the closure of the deal, which is subject to completion of customary conditions.
Wyde is headquartered in Minneapolis, USA, with a R&D centre in France. The company
has over 200 employees, mainly domain experts. It has developed and deployed
Wynsure, a software platform, at many of the leading insurance carriers in
North America and Europe. The platform is a multi-language, multi-currency, software
that offers policy administration, claims and billing solutions across Life & Annuities
(L&A), disability, health, and Property & Casualty (P&C) businesses.
Wyde caters to a robust customer base which include Tier I as well as Mid-market
insurers across the US, France and Canada. The company has been rated as a Top
4 player by Gartner in its area of operations. The company has a strong presence in
emerging markets through an acquisition made in Vietnam. It is also strong in the
mid-market segment, which is the fastest growing segment in insurance, we believe.
Wyde has more than 25 customers and according to the management, there is no
overlap with any Mphasis customer. The top client contributes 18% to total revenues,
second 12% and the next three clients bring in 10% each.
Strategic rationale
Wyde has a strong presence in the fast growing emerging markets and is also predominantly
in the mid-market segment, which is also witnessing high growth rates.
Wyde's Wynsure platform complements MphasiS' current insurance practice by offering
customers a range of software, business consulting and professional services.
We understand that, the acquisition will extend MphasiS' insurance footprint in Life
& Annuities segment and strengthen its existing capability in the Property & Casualty
segment. Currently, Mphasis gets about 10% of revenues from the insurance vertical.
The overall insurance market is estimated to be about $32bn globally.
Mphasis has the BPO expertise and had acquired applications expertise through the
acquisition of AIGSS in 2009. This acquisition will now make Mphasis an integrated
service provider with added expertise in IP and platforms. It will be able to provide
integrated services in areas such as policy administration, claims and billing.
On the other hand, MphasiS will provide Wyde with access to new markets and
scale to provide implementation and integration services to clients.
The addition of Wynsure will help Mphasis in scaling up its non-linear revenues
which are important from the margins perspective. Also, this will help it in reducing
revenue dependence on its largest client, HP.
For Wyde, in addition to the license sales, revenue come in from the related services.
Implementation, integration and AMC revenues contribute more than twice
the license revenues and are sticky in nature. This provides more stability and
scalability to revenues.
Financials
Wyde has annual revenues of about $30mn. The company enjoys operating margins
of about 18%, with PBT of 19% and PAT of about 18%. The company has net cash
of about $10mn. However, Mphasis is acquiring Wyde net of its cash.
Out of the total revenues of about $30mn, about 27% - 30% came from license
revenues, about 6% - 8% came from AMCs and the remaining from related services.
The company expenses out all the R&D expenditure which it incurs every
year.
The company has not disclosed the acquisition cost except for the fact that it is an
all-cash deal. It has also indicated that, similar deals have happened at between
2.5x - 4x revenues (ex-cash).
Thus, if we assume similar valuations for Wyde, we believe that, the overall impact
on Mphasis' consolidated financials will be negligible. We, therefore, maintain our
earnings estimates. We expect FY11 EPS to be at Rs. 38.4.
Concerns
n A delayed recovery in major user economies may impact our projections.
n A sharp acceleration in rupee from the current levels may impact our earnings
estimates for the company.
n While strong parentage is a positive, uncertainty over future allocation of business
remains a concern for the market.
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