Dec 03, 2012, 07.51 PM | Source: Moneycontrol.com
KRChoksey is bullish on MphasiS and has recommended accumulate rating on the stock with a target of Rs 435 in its December 3, 2012 research report.
, KRChoksey |
“MphasiS has entered into a definite agreement with Digital Risk LLC (DRL) to acquire it for USD 175 million with an additional earnout payment upto USD 27 million over time span of next 30 months and expects transaction to close by 31st January, 2013. The deal is both cash and debt free acquisition. DRL is US based service provider catering primarily to mortgage market and is expected to clock revenue of ~USD127 million in CY12E and has EBITDA margin of ~12%. Mphasis expects the acquisition to be EPS accretive in FY13E, which implies that DRL will register revenue growth of 20% plus in FY13E after clocking revenue growth of around 70% (Note- DRL has not made any acquisition) over the span of last 3 financial years. Besides being EPS accretive acquisition in the first year itself, the deal will enable to propel growth of its direct channel and help it to reduce its dependence on HP channel from 55% of the total revenue in Q3 FY12 to around 44% in FY13E. Considering the same, we maintain our “ACCUMULATE” recommendation on the stock.”
“DRL caters to US mortgage market (especially residential segment) and offers 4 type of services which are (1) Forensic Services- In-depth loan review (the largest player in US having 25% market share); (2) Regulatory Compliance- Ensures compliance with state/federal laws; (3) Origination Services- End-to-End origination fulfillment and loan modification support; and (4) Analytics Solutions- Through its analytical platform “Veritas” helps clients reduces their systematic and operational risk. The company employees 1,500 mortgage specialists primarily located in US and business model is transaction based i.e. non-linear revenue rather than Time and Billing rate model. Mphasis plans to up-sell and cross-sell its offshore based services to DRL clients and mortgage based services of DRL to its client base and is not considering to shift any work from onshore to offshore.”
“Hence, the company expects margin profile of the company to remain same in FY13E i.e. ~12% EBITDA margin and Net Profit margin of ~7%. Mphasis expects the deal to be EPS accretive in first year of acquisition itself, which implies that it expects DRL’s revenue to increase by 20% plus YoY in FY13E, assuming interest yield of ~8% for Mphasis leading to decline in Other Income by USD14 million compensated by consolidation of financials of DRL for 9 months in FY13E. Considering, revenue contribution of DRL for 9 months in FY13E, we expect share in total revenue of HP Channel to come down from 55% in Q3 FY12 to 44% in FY13E (assuming HP Channel register ~14% YoY.”
“We believe the acquisition will propel growth of its direct channel, which will enable Mphasis to reduce its dependence on HP channel from 55% of the total revenue in Q3 FY12 to around 44% in FY13E. Considering the same, we believe there is case for increase in valuation multiple of Mphasis from 8 times to 9 times its FY13E core business EPS of Rs.29.6. We maintain our ‘Accumulate’ recommendation on the stock with target price of Rs.435 (including cash per share of Rs.168),” says KRChoksey research report.
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