Accumulate Mphasis Ltd. - KR Choksey

Recent stock price correction makes valuation attractive

The dip in revenue from HP-Channel (constituting around 58% of total revenue) in Q2 FY12 by 2.8% (in constant currency terms) was in line with our expectation and the management guidance. However, decline in license income which is lumpy in nature adversely impacted revenue from Direct channel in Q2 FY12 which came as a negative surprise. The only respite for the company is continuous decline in DSO days which has helped in soaring up its cash kitty to Rs.2,339 crore (i.e. 30% of the market capitalization). The management is planning to use its cash balance for acquisition purpose in its focus areas i.e. banking & capital market, insurance and analytics which will help to propel its growth engine especially Direct Channel and also help to reduce its dependence on HP Channel. We believe, the stock is trading at attractive valuation especially after price correction post quarterly results and hence upgrade our recommendation on the stock from "HOLD" to "ACCUMULATE".

Lumpiness in license income led lower than expected total revenue

Revenue from Direct Channel declined by 2.6% QoQ (in constant currency terms) in Q2 FY12 adversely impacted by decline in license income which tends to be lumpy in nature. Whereas, dip in revenue from HP Channel by 2.8% QoQ in constant currency terms led by ramp-down of certain projects in HP enterprise segment was on expected line. The revenue from HP non-enterprise segment registered strong traction i.e. 17.4% QoQ growth as indicated by the management in the previous quarter.

Improvement in EBITDA margin in line with our expectation; however higher than estimated forex gain led better than projected net profit margin

EBITDA margin improved by 122 bps QoQ to 19.7% in Q2FY12 in line with our estimation. The improvement in margin was supported by increase in utilization led by reduction in billable manpower, full impact of renegotiation of overseas medical insurance and facility optimization. Net Profit margin came higher than our expectation i.e. 14.2% in Q2FY12 against our estimation of 13.5%, led by forex gain of Rs.8.3 crore against our projection of forex loss of Rs.9.5 crore.

Buy-back plan on back burner; board may use cash for acquisition purpose

The management has indicated that the board might utilize its cash balance for further acquisition especially in Banking & Capital segment rather than utilizing the cash balance for buy-back purpose as it had indicated earlier.

Valuation and view:

We believe the company's is trading at significantly lower valuation multiple (i.e. 7.7 times FY13E core business EPS -excluding other income; and considering net cash per share of Rs.96) compared to peer sets which more than set off the risk of slower growth than peer set growth in coming quarters. Hence, we recommend "ACCUMULTAE" on the stock by assigning multiple of 9 times to its FY13E core business EPS of Rs.32.3 and considering cash per share of Rs.96 and arrive at target price of Rs.387 per share.

Source : Equity Bulls

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