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Research
Sell Mphasis - Target Price of Rs 560 - Elara Capital
Posted On : 2010-05-28 10:40:50( TIMEZONE : IST )
- Rating : Sell
- Target Price : INR560
- Downside : 7%
- CMP : INR598 (as on 27 May 2010)
Revenue numbers in-line; margin uptick on 'one time' event
Revenue grew by 2.4% QoQ while margins were down by 50bps QoQ. Margins held largely steady on a QoQ basis driven by savings on G&A (down 70bps QoQ as a % of revenue). Savings in G&A was driven by one time reversal of certain accruals which will not recur in the coming quarters.
Our thesis of rate card cuts playing out - Expect impact from Q3
The company has announced a restructuring in the rate cards for the direct HP-EDS business (close to 30% of current revenue). This restructuring would be carried out on an annual revision (along with minor semi-annual revisions). This restructuring is expected to impact pricing from Q3 of this financial year as the first round was carried out and Q2 end whose effect would be visible from Q3 onwards.
Other metrics - BPO to remain weak
The 12.1% QoQ fall in BPO revenue was entirely led by volumes. The fall, however, is less sharp than it looks as in the last quarter, one time license revenue of INR 70mn was booked. However, the management did not seem very confident that the slide in BPO had been stemmed. The management commented that the decline in BFSI revenue is likely to be a 'one off' as certain projects got finished off in last quarter.
Maintain Sell; cutting target price on pricing headwinds
We are cutting our target price to INR 560, representing a 7% downside to the current stock price. Despite the steep price fall, we do not think that the stock price has fully factored in the potential impact of the rate card restructuring. We note that the three year restructuring plan ties in exactly with HP's plan of delivering additional savings of USD500mn from services. We now move to a DCF based valuation to arrive at our target price as we believe that the stock price will move to a floor till actual price cuts come into effect. We arrive at a target price of INR 560 based on our DCF.
