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Research
Accumulate Mphasis - Turning our call around on margins - Elara Capital
Posted On : 2010-11-24 10:58:03( TIMEZONE : IST )
- Rating : Accumulate
- Target Price : INR675
- Upside : 10%
- CMP : INR613 (as on 23 November 2010)
Numbers marginally ahead of our estimates
Topline revenue was marginally ahead of our expectations but missed on EBITDA margins, led mainly by a fall in ITO gross margins on a QoQ basis. The margin fall was largely led by the aggressive addition of headcount and lower ITO utilization at 66%. Mphasis registered a volume growth of 4.9% (Apps at 4.7%; ITO at 7.7% and BPO at 0.8%). The weak BPO business should be seen as a continuation of HP rationalizing its direct BPO business with Mphasis and is likely to be arrested from next quarter on.
Metrics point at a healthy future; attrition still a worry
Mphasis added 22 clients this quarter of which eight are direct clients for Mphasis. The management sees attraction in its strategy to emphasize more on direct clients than be solely HP focused. Client additions have been across BFSI, healthcare and manufacturing. On a like to like basis, Mphasis added 703 to offshore headcount. This strong addition is for is to provide for growth as well as high attrition. We expect the attrition to stabilize after the November round of increments.
Move to Accumulate as risk-reward turns favorable
We have had a negative view on the stock since initiation but at the current price, we think that the risk-reward has turned favorable. After four consecutive quarters of fall in EBITDA margins, we think that the trend would be arrested from here on. The management's current comments also seem to indicate that risks of realignment in HP pricing are on the wane. We introduce our FY12 (Oct ending) numbers and keep our target prices at 12.5x our new FY11 estimates at INR675, a 10% upside from current levels.
Risks to our rating
The two risks to our rating come from the overhang of another pricing adjustment with HP and higher S&M costs due to the focus on direct channel.
