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Dec 14, 2012, 02.56 PM IST | Source: Moneycontrol.com

Aditya Birla Money neutral on MphasiS; target Rs 400

Aditya Birla Money has maintained neutral rating on MphasiS with a target price of Rs 400, in its December 14, 2012 research report.

Aditya Birla Money has maintained neutral rating on MphasiS with a target price of Rs 400, in its December 14, 2012 research report.

"MphasiS, during Q4FY12, Mphasis’s topline declined by 3.6% to Rs 13.06 bn from Rs 13.55 bn on QoQ basis and decreased by 0.6% on YoY basis. The revenue continued to decline in $ terms for the fifth consecutive quarter, this time by modest 0.5%. HP channel continued to remain under pressure due to project ramp down (declined by 5.4% QoQ). Even, Direct Channel witnessed delay in project closures (declined by 1.5%). Interestingly, Non-ES part of HP business continued to grow at a healthy pace of  growth of 8.1% and helped them to increase the Non-ES proposition to 10.5% in Q4FY12 vs 6.2% in Q1FY12.

On FY12 basis, DC grew at a rapid pace by 35.7% over FY11, whereas HP channel de-grew by 10.6%. The DC rapid growth helped them to bring down HP revenue dominance to 54:46 in Q412 vs 62:38 in Q411. We believe Digital Risk acquisition is the step in right direction,  which would further help them to reduce HP proposition to below 50%.   

Despite revenue pressure, EBITDA improved by 2.3% to Rs 2.73 bn from Rs 2.67 bn on QoQ basis, with a further margin enhancement of 121 bps to 20.95% on QoQ basis (4th consecutive quarter of improvement). Basically, the margin improvement is due to higher utilisation rates across Application (85% vs 82%) and ITO (87% vs 85%) and cost rationalisation initiatives (QoQ). We believe the utilisation rates reached the peak levels to squeeze more out of it and Digital Risk would dilute the margin in the short term, as it operates at ~12%. 

PAT remained flat at Rs 2.09 bn on sequential basis and  increased by 14.4% on YoY basis.

Direct Channel and HP Channel: During the quarter, Mphasis added 22 clients, in that 14 clients in DC and rest 8 in HP channel. Since strategic changes in Q1FY11, Mphasis added  192 clients, in that 130 clients belong to DC and rest 62 belongs to HP channel.  Despite tough environment in BCM&I (Banking, Capital Market & Insurance ~40% of revenue), management is quite confident of growing DC at 1.5x on industry average for the next year, thanks to hyper- specialization initiatives. In addition, Digital Risk acquisition is step in right direction  towards high growth segment to reduce HP’s dependence. However, HP channel provides lesser visibility but Non-ES segment provides an excellent window to accelerate (46.6% growth in FY12) and contributes 8.3% of HP business vs 5.1% in FY11.     

Cash Utilisation Strategy: a) Mphasis has increased the dividend payout to ~45% (Rs 17/share) in FY12 from 16.6% (Rs 6.5/share) in FY11. The company has guided to maintain the payouts at the current levels. b) Acquired Digital Risk for $202 mn ($175 mn upfront payment and rest spread over 30 months) and looking for further buy-outs in suitable areas. It is confident of maintaining its cash accretion rate of $45-50mn/quarter.

Outlook & Valuation: Currently, Mphasis is trading at a consolidated P/E of 9.6x and 8.6x on its FY13E and FY14E earnings respectively.  We revise our estimates downwards by ~11% to factor in a) little room for margin expansion and b) Digital Risk impact and introduce FY14 earnings. We believe that a) cash generation capabilities and b) increased dividend payouts would protect the downside risk. However, the stabilization of HP business (not in near insight) and  b) pay-out from hyper- specialization in niche areas in DC would decide the long-term prospects of the company. We value Mphasis at 9x on its 1 yr forward EPS to arrive at a price target of Rs 400 and maintain our Neutral rating," says Aditya Birla Money research report.

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