Accumulate MphasiS; target of Rs 418: KRChoksey

“MphasiS, revenue from Direct Channel increased by 5.8% QoQ (in constant currency terms), as against our expectation of 3% QoQ growth in Q3 FY12. Whereas, revenue from HP Channel declined by 6.2% QoQ in constant currency terms against our expectation of dip by 5% QoQ. Higher than expected decline in revenue from HP Channel is primarily due to slower growth in HP non-ES segment (11% QoQ in CC terms against our expectation of 20% QoQ); whereas decline in revenue from HP- ES segment (7% QoQ) was as per our expectation and the management guidance.”

“The continued investment in sales effort (number of sales person increased by 10% YoY to 347 personnel) especially in case of Direct Channel seems to be delivering desired results in terms of client wins (20 new clients added by Direct Channel). Moreover, taking into account recent deal wins and pipeline, the company sounded confident of attaining higher than industry growth in revenue from Direct Channel.  The management has indicated that the revenue from HP Channel will continue to be under pressure for the next couple of quarters due to ramp down of projects by HP on account of transferring the business to 100% Indian subsidiary or HP losing out contracts to competitors. However, we believe the pressure in revenue from HP Channel is well known fact and the same is reflected in its relatively lower valuation compared to peer sets.”

“Despite concerns of lackluster volume growth in coming quarters, we believe the same is reflected in its relative lower valuation compared to peer sets. Moreover, taking into account that the company is trading at 16% FCF yield on TTM basis (Free Cash Flow on TTM basis is around Rs.860 crore, whereas Enterprise Value of the company is around Rs.5,490 crore), we believe the company is available at attractive valuation and hence recommend accumulate on the stock with target price of Rs.418 by assigning multiple of 8 times to its FY13E core business EPS of Rs.31.1 and considering cash per share of Rs.169,” says KRChoksey research report.

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