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MphasiS 3QFY2012 performance highlights and results update

Contributed by Angel Broking

For 3QFY2012, MphasiS’ numbers underperformed our expectation on the revenue front but came higher than expectations on the net profit front due to lower tax expense and higher other income. The company’s USD revenue declined on a qoq basis due to delays in ramp ups of few projects and weakness in discretionary spending. We maintain our Accumulate view on the stock.

Quarterly highlights: MphasiS reported revenue of US$252mn, down 3.5% qoq. In INR terms, revenue came in at Rs.1,355cr, up 2.0% qoq. During the quarter, revenue from the direct channel increased by 12.6% qoq (5.8% qoq increase excluding impact of INR appreciation) while revenue from HP channel declined by 2.3% qoq (6.2% qoq decline excluding impact of INR appreciation) due to ramp down in certain projects, especially in the area of enterprise services. EBITDA margin grew by merely 7bp qoq to 19.7%, as gains from INR depreciation were absorbed due to wage hikes given during the quarter.

Outlook and valuation: MphasiS’ revenue has been continuously getting hurt due to sluggish performance of HP-enterprise services (ES) business. Also, traction in HP non-ES business is below management’s initial expectation of US$90mn- 100mn in FY2012 and is in the range of US$50mn-60mn. The management continues to guide towards sustained weakness in HP-ES business channel which constitutes the bulk of Mphasis’ HP channel revenues. Going forward, management expects the direct channel (45% to revenue) and HP non-ES business (which is currently ~9% of revenue from the HP channel) to drive growth, whereas HP-ES business is expected to remain sluggish. We expect 5.6% INR revenue CAGR for MphasiS over FY2011-14E, considering that business from HP is sluggish and the overall macro environment is posing a high amount of uncertainty towards client budgets. Also, in our view, there is a good possibility that the company may use its cash pile of ~Rs.2,575cr to go for a buy-back. We maintain our Accumulate rating on the stock with a target price of Rs.390, valuing it at 10.5x FY2014E EPS.