Maintain 'HOLD' on Mphasis Ltd. – TP reduced to Rs.360 - Geojit BNP Paribas

- The management expects its parent HP's revenues (55 per cent of its total sales) to be under higher pressure given HP Enterprise Services' (HPES) own strategy change and loss of business from four of HPES's key accounts.

- This will hasten Mphasis' efforts to drive its direct revenue, which could lead to higher investments, lower margins and an EPS fall in FY13. Mphasis expects to significantly increase its direct channel investments including expanding its solutions offering, sales and marketing, building large deal teams, and possible acquisitions.

- Although the direct pipeline is steadily building, poor closures could see them contributing only in FY13. Given this and the recent USD/INR strength, a 2.7% QoQ revenue decline is expected in Q4FY12

- At the same time, Mphasis is expected to use margin levers such as headcount reduction and utilization which will limit any EPS cuts for Q4.

- However, FY13-14e revenue estimates have been cut by 2-5%, EBIT margin by 30-110 bps and EPS by 9-10%. As a result, the target price has been reduced to Rs.360 (from Rs.400 earlier).

- The stock is also likely to have a 4%+ dividend yield (net cash is 28% of market cap) and this yield could prevent a steeper stock fall than the EPS cuts would imply. Given the strong cash balance, the management may look to hike its dividend payout.

- The company follows an October year end and will be publishing its Q4FY12 results in November. The company's FY13 will commence from November 2012 onwards.

- Upside risks to Target Price: Renegotiating HP contract at better pricing terms and revenue from HP channel falling not more than 10%.

Source : Equity Bulls

Keywords