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MphasiS 3Q11 results confirm continuing growth challenges with adjusted USD revenues up
0.5% qoq (vs 2.9% reported) with HP channel down 0.3% and direct channel up 2%. With
continuing one time items/cost reversal, adjusted PAT was at Rs1.55bn, in our view, versus
reported Rs1.95bn (await clarity in the call).
Adjusted USD revenue growth of just 0.5% qoq
MphasiS reported USD revenue growth of 2.9% qoq for 3Q11. Excluding the onetime revenues (relating to reversal of credit notes pertaining to earlier periods which are no
longer required) worth around US$15m and including revenues worth US$8mn where invoicing
got delayed (while related costs were fully booked in 3Q11), adjusted revenues were up
marginally by 0.5% qoq versus our recurring revenue growth estimates of 3.2% qoq.
Revenues from HP channel grew by 3.5% on reported basis (with revenue
contribution unchanged qoq at 67%). Excluding the one time revenues as well as
including revenues where invoicing got delayed as explained above, adjusted revenues
from HP channel declined by about 0.3% qoq. Revenues from direct channel posted 2% qoq
growth.
On a reported basis, revenues from BFS (banking and financial services) and
insurance verticals declined by 5.1% and 1.3% qoq respectively largely due to project
closures in HP channel, while revenues from IT, Communication and Media vertical grew by
18.3% qoq.
Our brief chat with management indicated that revenue visibility is likely to remain
weak within HP channel and given increased macro headwinds, growth within direct channel
may also slow down going forward. This is also evident from net decline of 475 employees qoq
despite 87% of revenues are still dependent on T&M projects as well as current high utilisation.
However client addition remained healthy at 27 in 3Q11 (including 18 addition in direct channel)
Our brief chat with management also indicated that contract negotiation with HP
resulted in no major change in billing rates, as MphasiS (as per our earlier note)
declined to accept HP’s request for discount this time. However, the application billing rates for
onsite have declined by more than 2% qoq while ITO billing rate for offshore seems increased
qoq by more than 3%.
Adjusted margin seems declined significantly qoq
MphasiS reported EBITDA margin of 19.5% in 3Q11. However, after adjusting for the
one time revenues/delay in invoicing as well as continuing cost reversals, adjusted
EBITDA margins were much lower at 12.6% versus our expectation of 17.3%. We
await more clarity in the conference call.
We believe that besides lower revenue growth and wage inflation/promotion, higher
product development cost for Javelina business (Healthcare product within BPO
business) resulted in a loss of Rs166mn, leading to muted performance on consolidated
EBITDA.
We believe that with muted growth visibility, margins are likely to remain under
pressure going forward.
Reported PAT at Rs1.95bn was higher than our expectation of Rs1.74bn. However,
after adjusting for one-time revenues, delays in invoicing as well as cost reversals in cost of
revenues and SG&A, adjusted PAT in our view is around Rs1.55bn (EPS of Rs7.36 versus EPS
of Rs10.8/10.3 in 1Q11/2Q11). However, with recurring nature of cost reversals in most of the
recent reported quarters, we await the clarity regarding this in the conference call.
Our view
Overall, 3Q11 results on adjusted basis seems to be much weaker than our and
consensus expectations. MphasiS muted performance has been continuing over past
several quarters with 9MFY11 reported EBITDA/PAT down by 21% yoy while revenues
increasing by 2.5%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MphasiS 3Q11 results confirm continuing growth challenges with adjusted USD revenues up
0.5% qoq (vs 2.9% reported) with HP channel down 0.3% and direct channel up 2%. With
continuing one time items/cost reversal, adjusted PAT was at Rs1.55bn, in our view, versus
reported Rs1.95bn (await clarity in the call).
Adjusted USD revenue growth of just 0.5% qoq
MphasiS reported USD revenue growth of 2.9% qoq for 3Q11. Excluding the onetime revenues (relating to reversal of credit notes pertaining to earlier periods which are no
longer required) worth around US$15m and including revenues worth US$8mn where invoicing
got delayed (while related costs were fully booked in 3Q11), adjusted revenues were up
marginally by 0.5% qoq versus our recurring revenue growth estimates of 3.2% qoq.
Revenues from HP channel grew by 3.5% on reported basis (with revenue
contribution unchanged qoq at 67%). Excluding the one time revenues as well as
including revenues where invoicing got delayed as explained above, adjusted revenues
from HP channel declined by about 0.3% qoq. Revenues from direct channel posted 2% qoq
growth.
On a reported basis, revenues from BFS (banking and financial services) and
insurance verticals declined by 5.1% and 1.3% qoq respectively largely due to project
closures in HP channel, while revenues from IT, Communication and Media vertical grew by
18.3% qoq.
Our brief chat with management indicated that revenue visibility is likely to remain
weak within HP channel and given increased macro headwinds, growth within direct channel
may also slow down going forward. This is also evident from net decline of 475 employees qoq
despite 87% of revenues are still dependent on T&M projects as well as current high utilisation.
However client addition remained healthy at 27 in 3Q11 (including 18 addition in direct channel)
Our brief chat with management also indicated that contract negotiation with HP
resulted in no major change in billing rates, as MphasiS (as per our earlier note)
declined to accept HP’s request for discount this time. However, the application billing rates for
onsite have declined by more than 2% qoq while ITO billing rate for offshore seems increased
qoq by more than 3%.
Adjusted margin seems declined significantly qoq
MphasiS reported EBITDA margin of 19.5% in 3Q11. However, after adjusting for the
one time revenues/delay in invoicing as well as continuing cost reversals, adjusted
EBITDA margins were much lower at 12.6% versus our expectation of 17.3%. We
await more clarity in the conference call.
We believe that besides lower revenue growth and wage inflation/promotion, higher
product development cost for Javelina business (Healthcare product within BPO
business) resulted in a loss of Rs166mn, leading to muted performance on consolidated
EBITDA.
We believe that with muted growth visibility, margins are likely to remain under
pressure going forward.
Reported PAT at Rs1.95bn was higher than our expectation of Rs1.74bn. However,
after adjusting for one-time revenues, delays in invoicing as well as cost reversals in cost of
revenues and SG&A, adjusted PAT in our view is around Rs1.55bn (EPS of Rs7.36 versus EPS
of Rs10.8/10.3 in 1Q11/2Q11). However, with recurring nature of cost reversals in most of the
recent reported quarters, we await the clarity regarding this in the conference call.
Our view
Overall, 3Q11 results on adjusted basis seems to be much weaker than our and
consensus expectations. MphasiS muted performance has been continuing over past
several quarters with 9MFY11 reported EBITDA/PAT down by 21% yoy while revenues
increasing by 2.5%.
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