Accumulate Mphasis - HP: Boon or Bane - Dolat Capital

Organic growth remains cautious: It has sounded out strong outlook of 1.5x of market growth for its direct channel but maintain negative stance on HP Enterprise revenues. We believe the overall outlook to be bleak even after consolidating Digital Risk acquisition owing to sustained revenue fall in the HP revenues.

Acquires Digital Risk: Mphasis has acquired US based Risk, Compliance and Transaction management solution company; Digital Risk for a total EV of USD 202mn. Digital Risk employs about 1500 US based professionals and serve about 25-30 clients in the retail mortgage industry.The company has turnover of USD 127mn and Adj EBITDA margin of 12.2%. 3 year Revenue CAGR is 70%. It has license for 46 states in US and offer services across mortgage life cycle - Safe Act, Dodd Frank, Harp 2.0, MHA. We believe the deal actually brings in the much needed sales momentum to the company (2 yr Rev CAGR of 5%) but the deal is very expensive and EPS dilutive.

Road Ahead: It plans to grow direct channel and to gain industry leadership in chosen vertical - BFSI and Healthcare. It wishes to generate 20% of revenues to be solution driven and to maintain 15-18% OPM and reinvest the surplus. All incremental investments would be made in emerging services and specific niche spaces.

Building on Analytics: It is working on to possess strong capabilities in Advanced Analytics (unstructured data analytics such as Web 2.0) area that is likely to grow at 20% CAGR over 2011-15E (Source: Forrestor).

Mphasis to focus on claims analytics, customer analytics, contact centre analytics and predictive campaign analytics.

View: Maintain underperformer rating despite attractive valuations (8.5x on its FY14E Oct EPS) owing to dismal financial performance and sustained weak demand from HP (55% of the revenues).

Source : Equity Bulls

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