Mphasis - Moving towards stability, retain 'Accumulate' - Prabhudas Lilladher

We met Mr. Ganesh Murthy (CFO) of Mphasis to assess the business outlook for the company. The company is expected to witness a decline in organic (strong inorganic growth) revenue in Q2FY13. Moreover, stability in HP Channel and strategy to grow Direct Channel are likely to give steady growth in H2FY13. Retain "Accumulate".

- Q2FY13 organic weakness persists, Digital Risk (DR) to give revenue boost: According to the management, organic revenue is likely to decline by 2-3% QoQ due to a decline in both HP and Direct Channel, with EBIT margin at 15-16%. However, including DR, revenue will grow by 11-12% QoQ, with operating margin of 14-15%. However, due to cash outflow for acquisition and dividend and a higher tax rate, EPS is likely to be muted on QoQ basis.

- HP Channel ? Heading towards stability: The management expects a decline of 2-3% QoQ in Q2FY13. H2FY13 is likely to have less than 2% QoQ decline, but all major ramp-downs are over. The company has signed new MSA with HP and has not seen any changes in contracts (no pricing cut). The management is seeing good traction from HP channel as there are few early deal wins.

- Digital Risk ? Meeting the early success: In Q2FY13, the quarterly run rate was US$38-39m (Qtrly. Ann. rate is ~25% higher than the acquired size). The combined entity has bagged contracts for its product and is seeing a good demand environment. The growth rate of DR over the last three years was ~60%. However, the management is eyeing for EBIT margin expansion of DR from ~10% to ~15% in three years; hence, they want to strike a balance between growth and margin.

- Client mining ? A priority in Direct Channel: The company is working on increasing its wallet share with DC clients. The management categorized accounts as Platinum, Gold, Silver and Maintain to decide on priorities of investment in these accounts.

- Valuation and Recommendation: The business seems likely to be troughed out in H1FY13. We expect momentum to get better in H2FY13. We retain our 'Accumulate' rating, with target price of Rs420, 10x FY14 earnings estimate.

Source : Equity Bulls

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