Asit C. Mehta has come out with its report on MphasiS.
Asit C. Mehta has come out with its report on MphasiS .
“Mphasis Ltd. (Mphasis) has acquired 100% stake in Digital Risk LLC, a US-based company, for a total consideration of $202 mn. Digital Risk LLC is a risk analytics company specializing in the fields of Risk, Compliance and Transaction management in North America. The acquisition is an all cash deal, with Mphasis having to pay $175 mn upfront while the remaining amount is to be paid out of the earnouts over the next 30 months. The deal is expected to close by January 31st 2013.”
“The acquisition is a part of Mphasis’ strategy to focus on BFS and Capital Market segment. Considering the fact that the acquired entity has been growing well and analytics is an area of above-average growth for the industry, we believe that the 60% premium is justified. We believe that one of the major positives for the company is the fact that the non-HP or the direct revenues (which are expected to contribute 50% of the total revenues) will now show robust and a much needed improvement in order to mitigate the impact of low revenues in HP and HPES, which have been a major overhang on the company’s overall performance. In our previous updates, we have re-iterated our rationale that the company either needs to revive the HP channel or the direct business needs to grow at a faster pace and account for majority of the revenues in order to mitigate the HP overhang.
“We believe that MphasiS has already come very close to the doing the latter. Although this is a significant step towards the right direction, we believe that there is some amount of work pending in order to return to the ‘up and running mode’ (return to above industry average revenue growth mode). The prospects of the mortgage industry look better at present as mortgage rates are likely to remain low as a result of the US Federal Reserve’s initiative to buy mortgage-backed securities for an indefinite period, which will keep the rates low and result in greater off take of mortgage backed loans. As per the Mortgage Bankers Association, mortgage originations will be $1.7 trillion in 2012 and are likely to remain stable in 2013.”
Valuation and Recommendation Under Review: We have been regularly emphasizing on the fact that good performance in the direct channel was almost mandatory for the company to gain momentum in its financial performance. This acquisition is a sizable step towards that direction. However, it is important to consider that the company has been under performing compared to its peers in terms of revenues growth since the past eight quarters. Going ahead, we do not expect a hockey stick kind of recovery in growth rates as HP would still contribute 50% percent to the total revenues and remain a major overhang. The company is expected to report its October quarter and 2012 year end numbers on Wednesday, 5th December 2012. Hence, it would be wise to read this acquisition further in conjunction with the revenue performance in the October ending quarter. Until then, we keep our recommendation for Mphasis UNDER REVIEW, although the overall initiative is a definite positive for the company.
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