MphasiS - 2QFY2012 Result Update - Angel Broking

For 2QFY2012, MphasiS' numbers underperformed our expectation on the revenue front but came in-line with our expectations on the operating and net profit fronts. The company's USD revenue declined on a qoq basis due to delays in ramp ups of few projects and weakness in discretionary spending. At the CMP, the stock is trading at 9.7x FY2013E EPS with a strong cash position of Rs.2,340cr, which warrants limited downside. We maintain our Accumulate view on the stock.

Quarterly highlights: MphasiS reported revenue of US$261mn, down 1.7% qoq. During the quarter, revenue from the direct channel declined by 3.2% qoq to Rs.562cr because of lower license revenue and revenue from HP channel declined by 2.7% qoq due to ramp down in certain projects, especially in the area of enterprise services. The HP non-enterprise services area of business showed robust momentum with revenue growing by 17.4% qoq to Rs.59cr. EBITDA margin of the company expanded by 123bp qoq to 19.7%, aided by lower employee costs due to overall employee reduction and improvement in utilization level across all its business segments.

Outlook and valuation: MphasiS' revenue has been continuously getting hurt due to sluggish performance of HP-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. Going forward, management expects the direct channel (~42% to revenue) and HP non-enterprise solution business (which is currently ~5% of revenue from the HP channel) to drive growth, whereas HP-ES business is expected to remain sluggish. Also, business wise, we expect ITO to continue to be the possible growth driver for the company. We expect a 5.5% 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 for the next year and even tier-I companies are facing headwinds because of this. Also, in our view, there is a good possibility that the company may use its cash pile of ~Rs.2,340cr to go for a buy-back. We maintain our Accumulate view on the stock with a target price of Rs.373.

Source : Equity Bulls

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