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Research
Mphasis - DC drives growth, strong cash position; Upgrade to ADD - BRICS
Posted On : 2012-12-08 22:23:42( TIMEZONE : IST )
MPHL reported better than expected Q4FY12 results, with revenue down only 3.6% qoq to Rs13.1bn (adjusted for hedging reserve) and earnings up 0.3% qoq to Rs2bn. EBITDA margin expanded by 95bps qoq due to improved utilization and better cost management. We are raising our FY13/14 EPS estimates by 9% and 20% to adjust for the Rupee depreciation and Digital Risk acquisition, and increasing our TP to Rs410 (from Rs360 earlier). MPHL's strong cash position (up to Rs29.4bn, i.e. Rs140/share), coupled with its sustained high dividend payouts (Rs17/share for FY12), limits the possibility of a downside in the stock. Upgrade to ADD.
HP troubles and delay in deal closures pull down revenue: Revenue of Direct Channel (DC) business declined 3.1% qoq (down 1% qoq after adjusting for Rupee appreciation) due to a delay in deal closures. DC added 14 new clients in the quarter. HP revenue declined 6% qoq owing to continued project ramp downs and is likely to record a further decline of 15-16% in volumes over FY13. HP non-ES revenue grew 8.1% qoq. Margin expansion continues: EBITDA margin expanded by 95bps qoq to 20.7%, despite the Rupee appreciation, due to improved utilization, continued decline in manpower (currently 36,629 vs. 37,637 in Q3FY12) and improvement in operational efficiency. Blended utilization of application services and ITO improved to 88% and 89% in Q4FY12 vs. 85% and 86% respectively in Q3FY12.
Management's outlook: Management expects growth in DC to be 1.5x higher than industry growth, but sees limited revenue visibility for HP, which is likely to continue declining, with overall operating margin remaining in the 15-18% range. Management expects a quarterly cash accretion run rate of US$40-50mn.
Valuation: MPHL trades at a P/E of 11.1x FY13 and 8.6x FY14 earnings. HP's business outlook remains unchanged, while DC is expected to record growth, as deal closure rate recovers and impact of the Digital Risk acquisition plays out. Upgrade to ADD with TP of Rs410 (10x FY13-14 average earnings) in view of MPHL's strong cash generation, increased dividend payout, specialization strategy in niche areas and strong growth in DC.
