Hold Mphasis - No Negative Surprise is a positive surprise - Emkay Global

• Marginally ahead of estimated revenues at $ 290 mn (+7% QoQ) mainly driven by recoveries of revenues forgone in Q3 in Asia Pac Region
• EBITDA mgns were at 23.8%, down by ~90 bps QoQ on reported basis (we estimated flat margins) while were down by ~110 bps to 22.3% (ex hedging contribution)
• Overall headcount addition was flat driven by reduction in BPO Headcount by 1,141 and increase by 300/836 in Apps/ITO (Total Headcount at 39,962). Pricing was nearly flat
• Current Valuations at 10.7x/10.2x based on E EPS Rs 52.3/55 for Oct11/Oct12 with HOLD rating and target price of Rs 630, will be reviewed post the call scheduled at 11.30 a.m. today.

Marginally better show on revenues, margins a tad lower than expectations

Mphasis reported Q4FY11 revenues at Rs 13.45 bn (+5.2% QoQ, +18% YoY), marginally ahead of Emkay est of Rs 13.3 bn helped by higher than expected hedging gains of Rs 272 mn ( Emkay est of ~Rs 150 mn). US$ revenues(ex hedging gains) were up by ~7% sequentially to US$ 290 mn ( in line with est) with ITO revenues increasing by ~9% QoQ and Apps revenues increasing by 8.3% QoQ. EBITDA margins declined by ~90 bps QoQ to 23.8% on reported basis (we estimated flat margins) while were down by ~110 bps to 22.3% ( ex hedging contribution). Net Profits at Rs 2.84 bn (+4.9% QoQ, +16% YoY) were higher than Emkay est despite lower operating profits helped by higher forex gains ( at Rs 130 mn V/s expectations of loss of ~Rs 10 mn) and lower taxes (at 9.5% V/s expectations of ~11.5%). Co's operating metrics indicates that majority of all the revenue addition QoQ (~Rs 600 mn) has been driven primarily by recovery of revenues foregone in an Asia Pac telco a/c.

Reported pricing flat across segments, overall headcount flat QoQ on a/c of BPO reduction

Mphasis's reported pricing was nearly flat across the different business segments ( apps offshore pricing flat QoQ at US$ 20/hr, onsite apps pricing up to US$ 72/hr V/s US$ 71/hr in July'10 qtr). Headcount addition was flat with (1,141)/+300/+836 in BPO, Apps and ITO respectively.

Could see near term bounce back in the stock, to review estimates post call tomorrow

We do not rule out a bounce back in the stock given the underperformance heading into the results driven by expectations of weak results (some sections of the street expected Q4FY11 profits of ~Rs 2 bn). We would review our FY12E/13E earnings of ~Rs 52.3/55 post the investor call scheduled for 11.30 a.m today.Key things to watch out during the call in our view are (1) comments on any further pricing renegotiations/ volume related discounts related to business driven by the parent and (2) tax rates.

We currently have a HOLD rating on Mphasis with a price target of Rs 630.

Source : Equity Bulls

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