Mphasis Result Updated
Mphasis Result Updated
Mphasis Result Updated
Mphasis
Performance highlights
(` cr) Reported net sales Adjusted net sales* Reported EBITDA Reported EBITDA margin (%) Adj. EBITDA margin (%)* Reported PAT 3QFY11 1,294 1262 252 19.4 15.3 195 2QFY11 1,257 1,247 241 19.1 16.3 217 % chg(qoq) 2.9 1.2 4.5 31bp (97)bp (10.4) 3QFY10 1,279 1,279 316 24.7 24.7 271 % chg (yoy) 1.1 1.4 (20.4) (525)bp (940)bp (28.2)
ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (`cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 8,295 0.8 712/308 109,464 10 16,285 4,889 MBFL.BO MPHL@IN
`396 `420
12 Months
Source: Company, Angel Research; Note: * adjusted for one offs and reversals
Mphasis reported dismal set of 3QFY2011 results with volume growth of 3.0% qoq - out of which only 1.3% is from normal operations, the rest 1.7% is derived due to several one-off items booked in revenue. At the CMP, the stock is trading at 10.9x FY2013E EPS of `36.4 with a strong cash position of `2,029cr, which warrants limited downside. We recommend an Accumulate rating on the stock. Quarterly highlights: Mphasis reported revenue of US$290mn, up merely 2.9% qoq. In rupee terms also revenue growth was 2.9% qoq with revenues at `1,294cr. These revenues include one-time revenues of `66.5cr. Also, `34.6cr of revenues were not booked in this quarter due to incomplete documentation. Adjusting for all this, revenues came in at `1,262cr, up merely 1.2% qoq. Mphasis reported 31bp qoq expansion in its EBITDA margin to 19.4%. However, the company did provision reversal of `11.0cr in employee costs and `15.6cr in S&M expenses. Adjusting for these reversals and one offs in revenues, EBITDA margin came in at 15.3% vs. 16.3% in 2QFY2011. Outlook and valuation: The open billable positions in the application business declined from 1,000 to 825. However for the ITO business, it remained flat at 600. This highlights that growth in ITO remains intact and would continue to be the possible growth driver for the company. Going forward, management expects the direct channel (33% to revenue) and HP non-enterprise solution business (which is currently ~5% of revenue from HP channel) to drive growth, whereas the HP-ES business is expected to remain sluggish. We expect revenue growth will be muted at 2.7% yoy for FY2011E considering that in 1QFY2011 revenue run rate fell by 10% qoq as well as companys revenue for 2QFY2011 and 3QFY2011 were driven by one-offs. However, the above-mentioned growth drivers are expected to result in the companys revenue to record a 10% CAGR over FY201113E. We recommend Accumulate rating on the stock with a target price of `420, valuing it at 11.5x FY2013E EPS.
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 60.5 6.3 20.4 12.8
3m
1yr
FY2009 4,271 124.0 916 220.0 26.6 43.4 9.1 3.5 39.1 39.7 1.7 6.5
FY2010 5,036 17.9 1,091 19.0 25.1 52.0 7.6 2.5 33.1 32.9 1.3 5.3
FY2011E 5,102 1.3 808 (25.9) 18.9 38.6 10.3 2.1 20.1 19.8 1.2 6.5
FY2012E 5,485 7.5 707 (12.5) 16.2 33.7 11.7 1.8 15.3 15.1 1.1 6.6
FY2013E 5,924 8.0 719 1.6 14.5 36.4 10.9 1.6 13.6 12.5 0.9 6.1
Srishti Anand
022-39357800 Ext: 6820 [email protected]
Ankita Somani
022-39357800 Ext: 6819 [email protected]
3QFY11 1,294 940 354 102 252 44 208 (2) 44 250 56 195 9.3 19.4 16.0 14.6
2QFY11 1,257 919 339 98 241 34 207 1 48 257 39 217 10.4 19.1 16.5 16.6
9MFY2011 3,784 2,735 1,049 300 750 114 636 (0) 127
9MFY2010 3,691 2,447 1,244 300 944 126 818 1 77 896 89 806 38.5 25.6 22.2 21.9
Source: Company, Angel Research; Note: * adjusted for one offs and reversals
Dismal performance
Mphasis reported dismal set of numbers for 3QFY2011. Dollar revenues came in at US$290mn, up merely 2.9% qoq. In rupee terms also revenue growth was 2.9% qoq with revenues at `1,294cr, led by 3.0% qoq volume growth. These revenues include one-time revenues of `66.5cr in Application services business. Also, `34.6cr of revenue was not booked in this quarter due to incomplete documentation, however cost related to this is already there in companys financial statement. Adjusting for all the above mentioned items, revenues came in at `1,262cr, up merely 1.2% qoq. The companys volume growth on 3.0% qoq includes 1.7% qoq gain due to one off items, so actual operational volume growth came in at 1.3% qoq. Revenue of the applications services business (contributing 63.0% to revenue) increased by 5.4% qoq to `807cr. These revenues include one-time revenues of `66.5cr as well as unrealised revenues of `34.6cr, so on a like-to-like basis, revenues of application services business increased by 1.3% qoq. Revenue of the ITO business (contributing 25.5% to revenue) increased by 2.9% qoq to `327cr, however revenues from BPO business (contributing 11.5% to revenue) declined by 9.6% qoq to `147cr. Revenue of the BPO business got negatively impacted due to high base effect derived on account of one-time revenue of `10.2cr realised in 2QFY2011, so on a like-to-like basis, BPO revenue declined by only 3.5% qoq.
Also, on a consolidated level, Mphasis had a hedging reserve gain of `12.5cr in 3QFY2011.
% chg qoq 5.4 2.9 (9.6) 2.8 chg qoq (bp) 156 1 (158)
% chg yoy (0.3) 12.7 (7.4) 1.8 chg yoy (bp) (132) 246 (114)
Service vertical wise, application development and maintenance emerged as the companys primary growth drivers by posting 4.0% and 6.6% qoq. These segments were aided due to one off items in booked in revenues of application services. Revenues from infrastructure management also grew by 6.7% qoq to `271cr. However, all the other services verticals reported qoq decline in their revenues majorly because of high base effect of one time revenues booked n BPO segment in 2QFY2011.
3QFY11 473 335 73 58 64 271 8 36.9 26.2 5.7 4.5 5.0 21.1 0.6 0.0
2QFY11 443 322 77 69 73 253 8 35.6 25.9 6.2 5.6 5.8 20.3 0.6 0.0
% chg qoq 6.6 4.0 (5.2) (17.0) (11.7) 6.7 (1.3) chg qoq (bp)
% chg yoy 0.6 (1.1) 10.8 (16.9) (6.4) 20.0 (59.9) chg yoy (bp) (44) (78) 46 (101) (44) 319 (95)
Mphasis posted de-growth of 5.7% and 2.0% qoq in the banking and capital markets (contributing 24.8% to revenue) and insurance (contributing 9.5% to revenue) verticals, respectively. However, revenue of IT, communication and entertainment (contributing 30.0% to revenue) grew by whopping 17.5% qoq to `384cr.
August 24, 2011
% chg qoq (5.7) (2.0) 17.5 (0.1) (224.6) (46.6) 374.8 (103.6)
% chg yoy (3.8) 5.3 18.8 (6.4) (144.7) 31.2 429.2 (315.7)
Mphasis reported decline in onsite pricing in application services business of 2.8% qoq to US$70/hr from US$72/hr. This was because the company has replaced its subcontractors, which generally have billing rates of US$110/hr, in US with the companys employees having billing rates of US$70-72/hr. This was done by management because subcontracting of work was not yielding good margins to the company (at around 10%). Onsite price point of ITO business remained stable qoq at US$67/hr; however it reported increase of 5.0% qoq in its offshore price points to US$21/hr.
3QFY11 70 20 67 21 7
2QFY11 72 20 67 20 7
3QFY10 71 20 67 20 7
Client metrics
Mphasis has been focusing on direct channel strategy to win clients. During the quarter, revenue from direct channel increased by 2.9% qoq in rupee terms with revenues at `427.1cr. Also, overall, the company added 27 new clients in 3QFY2011; 18 in direct channel and 9 in HP channel. Vertical wise, six clients were added in the banking and capital market service industry, one in insurance, seven in IT, communication and entertainment and the rest 13 in emerging industries. Mphasis witnessed addition of two clients in the over US$5mn category one in direct channel and one in HP channel, however, two clients got reduced in in the over US$20mn category both from HP channel. In the overall client metrics, there was no addition or deletion of number clients having size greater than US$1mn in any of the channel.
3QFY11 120 42 78 41 13 28 24 9 15 12 4 8
2QFY11 119 41 78 39 12 27 25 10 15 14 4 10
3QFY10 109 34 75 39 11 28 22 9 13 13 3 10
Hiring muted
During the quarter, Mphasis recorded net reduction of 474 employees in its total employee base. Only application services business reported addition of 327 net employees in its headcount while the rest two businesses ITO and BPO reported net reduction of 244 and 557 employees in their employee base.
expenses. Adjusting for these reversals and one offs in revenues, EBITDA margin came in at 15.3% vs. 16.3% in 2QFY2011. Operational margins of all the three business segments got negatively impacted due to wage hikes given in 3QFy2011 of 10.5% to offshore employees and 2.5% to onsite employees.
(%)
72 70 68 66 64
68 66
3QFY10
2QFY11
3QFY11
BPO servics
(`)
400 200 0
Aug-08
Aug-09
Aug-10
Nov-07
Nov-08
Nov-09
May-08
May-09
May-10
Nov-10
Price
Source: Company, Angel Research
15x
12x
9x
6x
FY2013E
May-11
3x
TCS
Tech Mahindra
Wipro
Aug-11
Feb-08
Feb-09
Feb-10
Feb-11
965 202 1,167 16 1,183 (64) 1,118 (414) 322 (91) 1,027 (118) 1 (35) (761) (913) (2) 79 86 (9) 105 73 179
1,160 164 1,324 50 1,374 (119) 1,254 (520) 244 (275) 979 (86) (94) (6) (699) (884) 42 (39) 98 (95) (0) 179 178
865 158 1,023 121 1,144 (178) 966 (183) (92) (275) 692 (201) (16) (15) (180) (412) 1 18 98 (80) 200 178 378
758 182 941 160 1,101 (211) 890 (154) (27) (181) 709 (175) (5) (210) (390) 2 98 (97) 222 378 600
734 191 925 213 1,138 (228) 910 (82) 78 (4) 906 (175) (5) (300) (480) 44 98 (54) 372 600 972
10
Key ratios
Y/E Oct. Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days FY2009 FY2010 FY2011E FY2012E FY2013E
9.1 7.4 3.5 0.9 1.7 6.5 3.1 43.4 53.4 3.5 112 0.9 1.1 0.2 1.8 1.0 39.1 39.7 88.8 39.1 2.3 77 10
7.6 6.6 2.5 1.0 1.3 5.3 2.0 52.0 59.8 4.0 157 0.9 1.1 0.2 1.5 1.0 33.1 32.9 91.3 33.1 1.8 70 6
10.3 8.6 2.1 1.0 1.2 6.5 1.6 38.6 46.1 4.0 192 0.8 1.2 0.2 1.3 1.0 20.1 19.8 49.5 20.1 1.4 87 5
11.7 9.3 1.8 1.0 1.1 6.6 1.3 33.7 42.4 4.0 221 0.8 1.3 0.1 1.2 1.0 15.3 15.1 39.1 15.3 1.3 86 5
10.9 9.1 1.6 1.0 0.9 6.1 1.0 36.4 43.4 4.0 253 0.8 1.4 0.1 1.1 1.0 13.6 12.5 37.2 13.6 1.2 86 6
11
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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
Mphasis No No No No
Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
12