MphasiS - 2QFY2013 Result Update - Angel Broking

For 2QFY2013, MphasiS' numbers outperformed our expectations on the revenue front, but marginally disappointed on the operating margin and bottom-line front. The company's USD revenue got benefitted from Digital Risk's acquisition, which contributed US$34mn to revenues during the quarter. Revenues from the HP channel declined by 1.8% qoq while revenues from the Direct channel (organic basis) declined by 5.2% qoq. We maintain our Neutral rating on the stock.

Quarterly highlights: MphasiS reported revenue of US$267mn, up 12% qoq. Organic revenues came in at US$228mn, down 3.5% qoq and 14.1% yoy. In INR terms, revenue came in at Rs. 1,405cr, up 11.8% qoq. Despite healthy revenue growth, the consolidated EBITDA margin of MphasiS declined by ~130bp qoq to 17.2%. This could largely be attributed to the ~75% qoq rise in G&A expenses on account of integration of Digital Risk. Also, all the expenses of Digital Risk are onsite, so their quantum is higher. The PAT came in at Rs. 176cr, down 4.3% qoq.

Outlook and valuation: MphasiS' revenue has been continuously getting hurt due to sluggish performance of HP-enterprise services (ES) business. Also, traction in the HP non-ES business is below the scale initially expected by the Management. The Management cited that the deal pipeline in the direct channel remains robust and better than the pipeline in the corresponding period of last year. We expect a 5.3% and 7.1% USD and INR revenue CAGR for MphasiS over FY2012-14, considering that the business from HP is sluggish and client budgets for the next year remain flat. On the operating margin front, we see further pressure on MphasiS' margins going ahead on account of 1) implementation of wage increments, 2) increase in sales and marketing investments to revive growth in the Direct Channel and 3) lower margin profile of Digital Risk (10-11% EBIT margin vs MphasiS' EBIT margin at 15%+) despite benefiting from both, a weak currency and favorable hedges ahead. Currently we maintain our Neutral rating on the stock while any corporate event like buyout by HP or a stake sale by HP with substantial revenue guarantees possibly being upside triggers.

Source : Equity Bulls

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