Accumulate MphasiS; target of Rs 390: Angel Broking

“MphasiS reported revenue of US$252mn, down 3.5% qoq. In INR terms, revenue came in at Rs1,355cr, up 2.0% qoq. During the quarter, revenue from the direct channel increased by 12.6% qoq (5.8% qoq increase excluding impact of INR appreciation) while revenue from HP channel declined by 2.3% qoq (6.2% qoq decline excluding impact of INR appreciation) due to ramp down in certain projects, especially in the area of enterprise services. EBITDA margin grew by merely 7bp qoq to 19.7%, as gains from INR depreciation were absorbed due to wage hikes givenduring the quarter.”

“MphasiS reported a muted performance on the revenue front for 3QFY2012. USD revenue came in at US$252mn, down 3.5% qoq. The company’s revenue was impacted due to softness in the overall decision making cycle and continuous ramp down seen in some of the accounts of HP channel. In INR terms, revenue came in at Rs1355cr, up 2.0% qoq. During the quarter, revenue from the direct channel increased by 12.6% qoq to Rs633cr. Excluding the impact of INR depreciation, revenue from the direct channel grew by 5.8% qoq. Revenue from HP channel declined by 2.3% qoq (6.2% qoq decline excluding impact of INR appreciation) due to ramp down in certain projects, especially in the area of enterprise services. HP non-ES area of business showed robust momentum with revenue growing by 16.2% qoq to Rs64cr.”

“MphasiS’ revenue has been continuously getting hurt due to sluggish performance of HP-enterprise services (ES) business. Also, traction in HP non-ES business is below management’s initial expectation of US$90mn- 100mn in FY2012 and is in the range of US$50mn-60mn. The management continues to guide towards sustained weakness in HP-ES business channel which constitutes the bulk of Mphasis’ HP channel revenues. We expect 5.6% INR revenue CAGR for MphasiS over FY2011-14E, considering that business from HP is sluggish and the overall macro environment is posing a high amount of uncertainty towards client budgets. Also, in our view, there is a good possibility that the company may use its cash pile of Rs2575cr to go for a buy-back. We maintain our accumulate rating on the stock with a target price of Rs390, valuing it at 10.5x FY2014E EPS,” says Angel Broking research report.

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