MphasiS - Betting on direct channel for growth - Antique

MphasiS hosted its annual analyst meet in Mumbai where management articulated its growth strategy for the next three years. Management highlighted that while HP revenues remain under pressure, its strategy for direct channel is paying off as reflected by strong growth reported in FY12.

Below are the key highlights:

To grow direct channel at higher than market rates

Management highlighted that it intends to grow its direct channel business at a faster rate than that of industry. The company has chosen its path of hyper specialisation (inch wide, mile deep) strategy, where management is keen to invest in key focus areas. Consequently, while it has sales presence in 16 countries, it intends to focus only on US, UK and India market. In terms of verticals, it has chosen two (Banking, Capital markets & Insurance) as against presence in eight verticals in 2010. It is investing in emerging service lines (i.e., Mobility, Big data, Analytics, and cloud computing) and expects to derive at least 20% of its direct channel revenues from emerging service lines.

Share of emerging services to grow from 12% to 42% by FY20E

On macro growth drivers front, management indicated that traditional IT services spends are likely to remain flattish or see declines. Growth likely to be driven by emerging service lines. While IT services spends are likely to grow at a CAGR of 3% to USD641bn over FY12-20e, emerging services to grow by 21% to USD267bn and traditional services to decline by 2% to USD374bn. Share of emerging services likely to increase from 12% in FY12 to 42% by FY20e.

Continues to pursue acquisition; Dividend payout likely manageable

On acquisition, management highlighted that it continues to pursue acquisition opportunities in focus vertical and space. However, recent increase in dividend payout is largely manageable as per the management given strong cash generating ability (USD15m per month) of the company.

Sees strong growth opportunity for Digital Risk LLC

MphasiS recently acquired Digital Risk, a player in risk and compliance offering to the mortgage industry in US markets. Management highlighted that Digital had blue chip clients and offers end-to-end services (origination, compliance, and forensic). As per the management, Digital currently has constraints on supply side than on demand side.

Valuation and outlook

While recent acquisition of Digital Risk LLC is likely to add to direct channel revenues, overall revenue growth is likely to be impacted by decline in HP revenue stream. While stock at 9.7x Oct'13 PE trades at lower end of trading band, growth outlook continues to be muted. We retain a HOLD rating on the stock with a target price of INR415.

Source : Equity Bulls

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