Accumulate MphasiS - 3QFY2012 Result Update - Angel Broking

For 3QFY2012, MphasiS' numbers underperformed our expectation on the revenue front but came higher than expectation on the net profit front due to lower tax expense and higher other income. The company's USD revenue declined on a q-o-q basis due to delays in the ramp up of a 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 the 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. The EBITDA margin grew by a mere 7bp qoq to 19.7%, as gains from INR depreciation were offset by 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 the HP non-ES business is below the 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, the 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 a 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.

The MphasiS stock was trading at Rs.379.05, down by Rs.4.75 or 1.24%. The stock hit an intraday high of Rs.386.90 and low of Rs.375.

The total traded quantity was 0.13 lakhs compared to 2 week average of 0.13 lakhs.

Source : Equity Bulls

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