Neutral on Mphasis - Motilal Oswal

Mphasis 3QFY10 posted results in line with estimates with revenue of Rs12.8b and PAT of Rs2.7b. EBITDA margins fell 110bp (v/s estimate of 190bp). Results were operationally in line, even after excluding one-off gains (Rs100m in revenue, Rs130m reversal in G&A and Rs150m in tax write-backs), largely offset by a one-time charge of Rs140m in the telecom vertical on outage costs at one site, penalties accrual on non-conformance with SLAs and resultant revenue loss.

Key highlights:

- Limited risk of pricing cut recurrence going forward with pricing below market rates across segments and stable pricing outlook from the management. Organic pricing increases in ITO (excluding the Fortify acquisition and one-off revenue impacts) and expectations of US$20/hour hereon (v/s US$18/hour in 2QFY10) were a key positive.

- Volume traction is strong with a 15% QoQ headcount addition in ITO, 2,700 open positions in ITO and applications, expectations of a return to growth in BPO and reduction in utilization by 1,100bp in apps and 800bp in ITO, leaving scope for increases, once attrition stabilizes. Strong ITO traction indicates continued offshoring momentum by HP.

- Higher than estimated offshore pricing decline in applications (13% QoQ against our estimate of 5%) was a key negative. Onsite pricing is expected to be stable at US$71 (1.4% QoQ decline v/s our estimate of a 5% decline).

Valuation and view: Our estimates are largely unchanged after the results. We expect US dollar revenue CAGR of 25.2% and an EPS CAGR of 12% over FY09-11. We maintain Neutral with a target price of Rs705 (upside of 13%), based on 13x FY11E (year ending October). There are possible volume surprises on a greater offshoring trend by HP, as highlighted by MNC vendors like Cap Gemini (intention of 8% offshore effort shift over two years) and Accenture (8% shift towards global delivery headcount over the past four quarters). Mphasis is our preferred pick among mid-cap IT companies.

Source : Equity Bulls

Keywords