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UBS Investment Research
MphasiS Limited
Weakness in HP revenue likely to continue
[ EXTRACT]
HP’s restructuring could impact near-term revenue visibility
Hewlett-Packard (HP), which owns 60.5% of MphasiS and contributes nearly 70%
of revenue, has announced a major restructuring of its business. Enterprise services
remains weak for HP, which has guided for margin decline in this segment over the
next few quarters. We expect this to impact revenue visibility for MphasiS.
HP revenue could turn negative, dragging down growth
Revenue from HP is already sluggish at 1-2% QoQ growth, down from 2-3% a few
quarters ago. While MphasiS management does not expect it, we do not rule out a
negative growth contribution from HP-related revenue streams. We also expect
further pricing pressure given the pressure on HP’s margins.
Lower revenue and earnings estimates
We lower our FY12/13 revenue estimates 5%/11% and our FY12/13 EPS estimates
from Rs36.94/41.34 to Rs34.24/37.37 (7%/10%) to reflect the potential slowdown
in both HP and non-HP revenue due to a slower demand environment.
Valuation: downgrade to Sell, lower price target from Rs500 to Rs350
We downgrade our rating from Neutral to Sell on revenue concerns related to HP.
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a 12% WACC
and 3% terminal growth.
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.
Statement of Risk
We believe that the recently announced restructuring at Hewlett-Packard,
coupled with a sharp decline in IT spending due to macroeconomic disruptions
could impact our revenue estimates. Appreciation of the Indian rupee against
major global currencies could also impact profitability for the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
MphasiS Limited
Weakness in HP revenue likely to continue
[ EXTRACT]
HP’s restructuring could impact near-term revenue visibility
Hewlett-Packard (HP), which owns 60.5% of MphasiS and contributes nearly 70%
of revenue, has announced a major restructuring of its business. Enterprise services
remains weak for HP, which has guided for margin decline in this segment over the
next few quarters. We expect this to impact revenue visibility for MphasiS.
HP revenue could turn negative, dragging down growth
Revenue from HP is already sluggish at 1-2% QoQ growth, down from 2-3% a few
quarters ago. While MphasiS management does not expect it, we do not rule out a
negative growth contribution from HP-related revenue streams. We also expect
further pricing pressure given the pressure on HP’s margins.
Lower revenue and earnings estimates
We lower our FY12/13 revenue estimates 5%/11% and our FY12/13 EPS estimates
from Rs36.94/41.34 to Rs34.24/37.37 (7%/10%) to reflect the potential slowdown
in both HP and non-HP revenue due to a slower demand environment.
Valuation: downgrade to Sell, lower price target from Rs500 to Rs350
We downgrade our rating from Neutral to Sell on revenue concerns related to HP.
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a 12% WACC
and 3% terminal growth.
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.
Statement of Risk
We believe that the recently announced restructuring at Hewlett-Packard,
coupled with a sharp decline in IT spending due to macroeconomic disruptions
could impact our revenue estimates. Appreciation of the Indian rupee against
major global currencies could also impact profitability for the company.
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