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MphasiS (MPHL IN)
N(V): Weaker performance continues in 3Q11 results
Weak revenue growth continues
3Q margins disappoint on a normalised basis; will remain
under pressure, in our view
We cut our TP to INR470 from INR380, because of lower
estimates and target multiple, but remain Neutral (V)
MphasiS reported revenues of INR12.94bn, +2.9% q-o-q, marginally below our estimate of
INR12.98bn; in USD terms, revenues were USD290m, +3% q-o-q. Revenues include a oneoff credit reversal of INR665m, excluding which the top line declined 2.4% q-o-q. Provisions
were written off in selling expense as well as cost of sales, aiding margins. EBIT margins fell
50bp to 16% on account of higher depreciation expense and wage hikes effective this quarter.
The EBIT margin post adjustment for one-off line items is 9.2% (refer to table 1). Nonoperational income contributed to 17% of profit before tax. Net earnings per share at INR9.25
declined 10.3% q-o-q on account of a higher tax rate (22% compared with 15% in 2Q11).
Divisional performance: BPO services dampened growth, declining 9.6% sequentially,
owing to one-time revenue recognised in the previous quarter. On a normalised basis,
volumes grew merely 1.3% sequentially. Management alluded to pricing pressure from
HP and other direct channel customers, increasing risks to margin recovery. Macro
weakness, particularly in the banking and insurance (c35% of revenues) vertical, is likely
to add pressure on MphasiS. Efforts to diversify, in the form of 18 new direct channel
clients and 13 of these new customers in emerging industries, is comforting, but the scale
remains too small to influence overall company growth significantly.
Headcount addition weak as well: Net headcount declined 1.1% sequentially,
particularly onsite (-2.4%) where application services sub-contractors were replaced by
full-time employees. The number of open positions in apps and IT are 825 and 600,
respectively, which together is 3.5% of the current employee strength. Management is
considering inorganic growth initiatives to make use of excess cash (USD459m) on its
balance sheet. MphasiS expects to consolidate Wyde Corporation from this September,
and this acquisition is thought to be valued at 2.5x-3.5x TTM revenues (~USD30m).
Valuations: We revise our FY12 earnings estimate to INR37.9, from INR40, owing to
lower top-line growth and profitability. We cut our target valuation as well to 10x from 12x
on our FY12e EPS because of the lower earnings growth outlook and overall
macroeconomic uncertainty. This is a 45% discount to larger peer Infosys and 30% discount
to HCLT; therefore, we cut our TP to INR380 from INR470 and remain Neutral(V).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MphasiS (MPHL IN)
N(V): Weaker performance continues in 3Q11 results
Weak revenue growth continues
3Q margins disappoint on a normalised basis; will remain
under pressure, in our view
We cut our TP to INR470 from INR380, because of lower
estimates and target multiple, but remain Neutral (V)
MphasiS reported revenues of INR12.94bn, +2.9% q-o-q, marginally below our estimate of
INR12.98bn; in USD terms, revenues were USD290m, +3% q-o-q. Revenues include a oneoff credit reversal of INR665m, excluding which the top line declined 2.4% q-o-q. Provisions
were written off in selling expense as well as cost of sales, aiding margins. EBIT margins fell
50bp to 16% on account of higher depreciation expense and wage hikes effective this quarter.
The EBIT margin post adjustment for one-off line items is 9.2% (refer to table 1). Nonoperational income contributed to 17% of profit before tax. Net earnings per share at INR9.25
declined 10.3% q-o-q on account of a higher tax rate (22% compared with 15% in 2Q11).
Divisional performance: BPO services dampened growth, declining 9.6% sequentially,
owing to one-time revenue recognised in the previous quarter. On a normalised basis,
volumes grew merely 1.3% sequentially. Management alluded to pricing pressure from
HP and other direct channel customers, increasing risks to margin recovery. Macro
weakness, particularly in the banking and insurance (c35% of revenues) vertical, is likely
to add pressure on MphasiS. Efforts to diversify, in the form of 18 new direct channel
clients and 13 of these new customers in emerging industries, is comforting, but the scale
remains too small to influence overall company growth significantly.
Headcount addition weak as well: Net headcount declined 1.1% sequentially,
particularly onsite (-2.4%) where application services sub-contractors were replaced by
full-time employees. The number of open positions in apps and IT are 825 and 600,
respectively, which together is 3.5% of the current employee strength. Management is
considering inorganic growth initiatives to make use of excess cash (USD459m) on its
balance sheet. MphasiS expects to consolidate Wyde Corporation from this September,
and this acquisition is thought to be valued at 2.5x-3.5x TTM revenues (~USD30m).
Valuations: We revise our FY12 earnings estimate to INR37.9, from INR40, owing to
lower top-line growth and profitability. We cut our target valuation as well to 10x from 12x
on our FY12e EPS because of the lower earnings growth outlook and overall
macroeconomic uncertainty. This is a 45% discount to larger peer Infosys and 30% discount
to HCLT; therefore, we cut our TP to INR380 from INR470 and remain Neutral(V).
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