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MphasiS 4QFY2013 performance highlights and results update

December 9, 2013, Monday, 10:45 GMT | 05:45 EST | 15:15 IST | 17:45 SGT
Contributed by Angel Broking

For 4QFY2013, MphasiS’ numbers came in below our as well as street expectations. The result highlighted that the company continues to struggle in terms of growth with revenues from the HP business declining by 5.5% qoq with direct channel revenues remaining flat qoq. While HP channel and Emerging businesses in direct channel continue to struggle, traction in Mphasis’ acquired company Digital Risk is the only incremental positive. We maintain our Neutral rating on the stock.

Quarterly highlights: MphasiS reported a revenue of US$260mn, down 2% qoq, and lower than our expectation. Weak growth in the direct channel business was disappointing, especially against the backdrop of strong growth reported by other Indian IT companies during the July-September 2013 quarter. In INR terms, the revenue came in at Rs.1,594cr, up 3.5% qoq. The consolidated EBITDA and EBIT margins of the company declined by 68bp and 52bp qoq to 17.5% and 15.3%, respectively. This was mainly on account of sales return of ~Rs.25cr taken on the India government business and higher hedge losses sequentially. Consequently, the PAT came in at Rs.190cr, down 1.3% qoq.

Outlook and valuation: MphasiS’ revenue has been continuously hurt due to sluggish performance of HP-enterprise services business. Also, traction in the HP non-ES business is below the Management’s initial expectation. Direct channel revenue growth is seeing some positive signs; however, decline in HP channel continues unabated and will likely offset the positive signs emerging from the rest of the business. Within the Direct channel, the company’s endeavor to grow at 1.5x the industry is limited only to the mature market, which is 38% of the company’s business (excluding Digital Risk). Excluding Digital Risk, we expect this segment to grow in line with the industry (the segment grew 13% in FY2013). Investments necessary to build pipeline in the Direct channel will be a drag on margins going ahead. We expect a 5% and 9% USD and INR revenue CAGR respectively for MphasiS over FY2013-15E, considering that the business from HP is sluggish and client budgets for the next year remain flat. Valuing MphasiS’ stock at 10x FY2015E EPS, the target price comes out to Rs.412. Currently we maintain our Neutral rating on the stock; any corporate event like buyout by HP or a stake sale by HP with substantial revenue guarantees could be upside triggers.