Prabhudas Lilladher's report on MphasiS
"Mphasis reported its Q1FY14 revenue in-line with beaten down Cons/PLe expectations due to revenue reversal in India business. Pricing has been stable. We expect HP’s performance to remain weak in FY14, whereas Direct Channel (DC) is expected to witness a steady growth. However, improving demand environment, focus on reducing HP exposure, good cash conversion and high dividend yield will restrict the downside."
"Revenue declined by 3.2 percent QoQ to Rs15,888m (PLe: Rs15,577m, Cons: Rs15,798m), whereas EBITDA margins declined by 170bps to 18.2 percent (PLe: 17.8 percent, Cons: 17.8 percent) due to higher S&M (15 percent QoQ) and G&A (8 percent QoQ) cost and lower number of working days. EPS declined by 5 percent QoQ to Rs8.6 (PLe: Rs8.95, Cons: Rs9.38) despite lower forex loss of Rs364m (Q2FY13: -Rs536m)."
"Mphasis added 11 (Q4FY14: 8, Q1FY13: 14) new clients from DC. Moreover, DC’s revenue grew by 1 percent QoQ (+2.2 percent in USD terms) to Rs9,965m due to contribution from Emerging Market, up 28.2 percent QoQ, largely driven by growth in India business (18.6 percent QoQ) (revenue reversal: Rs100m). The company sold its Indian government business; this will affect the company’s P&L and B/S in the next quarter."
"Management was confident of growth in DC ahead of industry growth. They have hired account managers and sales professionals over the last four quarters for 12 key accounts and focused verticals & services. We expect mid-teens growth for DC."
"The management sees volatility in DR; hence, the management has transferred 780 employees to a temporary payroll, a practise common in mortgage processing business. DR has been ahead of expectation on revenue and margin front and bagged two deals worth US$70m."
Valuation & Recommendation: "We believe improved demand alongwith inorganic venture would help reduce HP exposure. Retain “Accumulate” with TP of Rs 430, 10x FY15E earnings estimate," says Prabhudas Lilladher research report.
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