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Mar 04, 2013, 04.53 PM IST | Source: Moneycontrol.com

Accumulate Mphasis; target Rs 420: P Lilladher

Prabhudas Lilladher is bullish on Mphasis and has recommended accumulate rating on the stock with a target price of Rs 420 in its February 28, 2013 research report.

Prabhudas Lilladher is bullish on Mphasis and has recommended accumulate rating on the stock with a target price of Rs 420 in its February 28, 2013 research report.

"Mphasis reported its Q1FY13 results ahead of PLe, but touch below Consensus expectations. The disappointment was largely due to weakness in the HP channel. Pricing for ITO (Onsite) has declined again for the quarter, whereas others have been stable. We expect the performance to bottom-out in H1FY13 and likely uptick in H2FY13.

Ahead of our expectation, but fallen short of consensus expectation: Revenue declined by 4.4% QoQ to Rs12,804m (PLe: Rs12,412m, Cons: Rs13,187m), whereas operating margins contracted by 282bps to 19.8% (PLe: 20.46%, Cons: 19.50%) due to shut-downs and lower working days. EPS declined by 11.9% QoQ to Rs8.76 (PLe: Rs8.56, Cons: Rs9.22).

Direct Channel affected due to shutdowns: The company added 14 (Q4FY12: 14) new clients from Direct Channel (Total 22). Moreover, Direct Channel revenue grew by 1.1% QoQ to Rs6,207m affected by Mature Market decline of 1.4% QoQ largely due to shudowns and lower working days. The company is reducing its exposure in the Indian government business.

Pricing pressure in ITO sustained: Pricing for ITO (Onsite) witnessed a decline of 3.3% QoQ after declining 4.4% last quarter. In our recent conversation with the management, they sounded confident on revenue stability in HP account from H2FY13. However, they expect revenue decline of ~5% QoQ in Q2FY13.

Q2FY13 - Direct channel and Digital Risk to contribute for growth: We expect Direct Channel growth to bounce back to 2-3% QoQ from Q2FY13. Moreover, Digital Risk (Revenue: $150mn/year) would contribute for ~2.5 months in Q2FY13. We expect muted rupee term revenue for FY13, inclusive of revenue contribution of ~100mn from Digital Risk in FY13.

Valuation & Recommendation: We remain optimistic about the execution of the company’s strategy to reduce HP’s dependence. We see performance of the company troughing in H1FY13 with better momentum in H2FY13. We reiterate our "Accumulate" rating, with TP of Rs 420, 10x FY14e earnings estimates," says Prabhudas Lilladher research report.

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