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MphasiS 1QFY2013 performance highlights and results update

Contributed by Angel Broking

For 1QFY2013, MphasiS’ numbers underperformed our expectation on the revenue as well as the operating front. The company’s USD revenue declined on a qoq basis due to the prevalence of holiday season onsite and delays in the ramp up of a few projects in the HP channel. Revenues from the HP channel declined by 9.1% qoq while revenues from the Direct channel grew by 1.1% qoq. We maintain our Accumulate view on the stock.

Quarterly highlights: MphasiS reported a revenue of US$238mn, down 4% qoq. In INR terms, revenue came in at Rs.1,257cr, down 3.8% qoq. Service vertical wise, only infrastructure services posted a sequential growth of 3.6% qoq while all the other services areas reported a sequential decline in revenues. The EBITDA margin declined by 215bp qoq to 18.5%; 100bp of the 215bp decline is explained by seasonal shutdowns during the quarter.

Outlook and valuation: The Management continues to guide towards sustained weakness in the HP-enterprise services (ES) business channel, which constitutes the bulk of Mphasis’ HP channel revenues. The Management reiterated its organic growth target of 1.5x industry average for the Direct channel business, aided by a robust deal pipeline, and traction in the US and Indian markets. The pipeline in the Direct channel remains robust; compared to the corresponding period last year, the current pipeline is up by 10-20%. The company closed Digital Risk’s acquisition during the quarter. At the time of acquisition, the revenue run rate from Digital Risk was ~US$127mn and was growing at a rate of 50%+. While the traction is not the same now, growth rates still remain healthy for Digital Risk. We expect a 4.6% and 6.4% USD and INR revenue CAGR for MphasiS over FY2012-14, considering that the business from HP is sluggish and client budgets for the next year remain flat. Among the positives, cash flow generation from operations continues to remain healthy, and the cash kitty is sizeable even after considering the expected outflow of ~Rs.1,160cr in 2QFY2013. We maintain our Accumulate rating on the stock with a target price of Rs.403.