Buy Mphasis; target Rs 407: PINC Research

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Buy Mphasis; target Rs 407: PINC Research

PINC Research is bullish on Mphasis and has recommended buy rating on the stock with a target price of Rs 407 in its December 2, 2011 research report.

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PINC Research is bullish on Mphasis and has recommended buy rating on the stock with a target price of Rs 407 in its December 2, 2011 research report.

"Mphasis' revenues declined by 5.5%QoQ to USD274mn in Q4FY11. Excluding one-off reversal of credit note in Q3FY11, sequential topline growth was flattish. For FY11, revenue grew marginally by 1.5%YoY to USD1116mn. Investments in driving the Direct channel growth are paying off, which compensated decline in HP channel to some extent. Growth in the near term is expected to be subdued due to headwinds faced by HP. Revenues in INR terms grew 1.6%QoQ driven by the depreciation of rupee (realized rate of INR47.95/USD in Q4FY11 vs INR44.63/USD in Q3FY11). Excluding one-off reversal of credit note of Rs 665mn in Q3FY11, topline grew by 7.1%QoQ. Decline in pricing, higher S&M expenses and greater Onsite effort shift resulted in 158bps QoQ decline in operating margins. Diluted EPS for Q4FY11 was Rs 8.7 against Rs 9.3 in Q3FY11. MphasiS has declared a dividend of Rs 6.5/share for FY11."

"MphasiS has been making investments for increasing revenue contribution from Direct channel. For Q4FY11, Direct channel grew 18.9% against 4.4% decline in HP business. Of the 25 clients added during Q4FY11, 17 were from Direct channel. HP & Direct channel share changed to 62:38 in Q4FY11 from 67:33 in Q3FY11. During Q4FY11, technical headcount declined by 856 to 38,911. But the attrition rate is cooling off. There are over 1000 open positions in Apps and ITO together. Blended utilisation including trainees for ITO and BPO increased by 500bps & 400bps to 80% and 70% respectively."

"HP has guided for flattish earnings growth for FY12, indicating headwinds being faced across business verticals in the near term. In light of the recent depreciation of rupee, we have revised our INR/USD estimate for FY12 by +5.6% to Rs 47.5. We introduce our FY13 estimates with INR/USD rate assumption of Rs 46.50. Incorporating these factors, our EPS estimates for FY12 and FY13 are Rs 42.1 (12.6% upward revision) and Rs 40.7 respectively. We maintain 'BUY' recommendation on the stock with a target price of Rs 407 based on 10x FY13E earnings," says PINC Research report.

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To read the full report click on the attachment