Citigroup has recommended buy rating on Mphasis BFL with target price of Rs 400.
Citigroup report on Mphasis:
Initiating at Buy: Key to EDS Bestshore Strategy
Target price of Rs 400
We initiate on Mphasis at Buy (1M) with expected 53% revenue CAGR and 44% EPS CAGR over FY07-10E. Our estimates do not incorporate the pending EDS India merger, which is likely to be 10-20% EPS accretive. We arrive at a target valuation of ~21x FY09E EPS when we build in 15% EPS accretion.
Critical piece in EDS strategy
In the past, EDS has grappled with its offshore strategy and lost market share due to a weak offshore presence. The Mphasis acquisition was made to address this. We view it as a critical piece of EDS's bestshore strategy, which is key for the success of its global delivery model.
Demand side almost guaranteed; execution key
EDS is a USD 20bn+ organization with new order bookings exceeding US$26bn last year. Demand is ensured from EDS relationship as many new orders have a sizeable offshore component. Management is taking steps in the right direction to address supply side challenges - successful execution would result in growth acceleration.
Is delisting the endgame?
It might make sense for EDS to de-list Mphasis in the medium to long run. It may, however, retain the listing to: a) use Mphasis stock options as incentives; b) give better accountability and transparency as an audited listed entity, and c) to retain offshore as profit center (vs. cost center).
Risks
Risks include supply-side challenges, ability to execute complex projects, INR appreciation, wage inflation. No forex cover for cash flows might impact 1Q08 negatively; stock correction could provide enhanced entry point.
