Buy or sell: Will strategy change work for MphasiS?
Shares of MphasiS Ltd have plunged about 28% over the last three trading sessions, compared with a 1.6% rise in the 10-share IT index, on weak quarterly results and questions over business with its largest client and shareholder.
March 04, 2011 / 11:29 IST
Shares of MphasiS have plunged about 28% over the last three trading sessions, compared with a 1.6% rise in the 10-share IT index, on weak quarterly results and questions over business with its largest client and shareholder.
Last week, the mid-tier outsourcer, in which Hewlett-Packard Co owns 60.53%, posted a 15% decline in its January-quarter profit due to sluggishness in its HP channel business and price cuts, denting revenue by about 3.5%. MphasiS reiterated its intention of wanting to expand its non-HP business and grow in emerging markets, thereby reducing its dependence on HP, which accounts for about 70% of revenue.So, will the company's strategy of focusing on non-HP business help the firm in getting back on track?No reason to hold on to MphasiSElara Capital analyst Pralay Das, who has a "sell" rating on the stock, said the change in strategy will take at least three or four quarters more to take shape and until then, there is a lot of uncertainty and investors have ample choice in IT stocks."What will really happen is while the HP revenues can ramp down over a relatively faster period of time, the new revenues will take time because IT projects typically don't ramp up overnight," Das said. "So there really is no reason to hold on to MphasiS at this point in time."An analyst with a Mumbai-based brokerage said going forward, HP as a client is expected to take precedence over HP as a shareholder. The analyst also cited certain "corporate governance" issues that prompt a "sell" rating on the stock."There was revenue of USD 9 million in the fourth quarter, which was one-time, so obviously if the company doesn't tell you it's one-time, we will base their next quarter earnings on that USD 9 million as well," the analyst, who did not wish to be named, said."Secondly, there were certain reversals in provisioning that MphasiS had done in first and fourth quarters of FY10, which was again not told to us or anybody on the Street, and it artificially kept the margins high," he added.Good time to enter the stock Dhananjay Mishra, an analyst with Sushil Finance, believes the company will start delivering good results in the next two or three quarters again as the company has been actively expanding its non-HP business."The major benefit will come after two or three quarters because they started their transformation in the last quarter only," Mishra, who rates the stock "buy," said. "For new investors obviously it's a good price to get into."Mishra said HP also being a promoter in the company, there probably won't be any more price negotiations with HP and margins would stabilize at current levels.An Angel Broking analyst, who did not wish to be named, said the price cuts with HP will impact the current quarter, but from here on pricing should be stable."Next quarter we don't see much of an upside, but I guess, after that, MphasiS should post better results," she said. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
