Hold Mphasis; target of Rs 347: KRChoksey

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Hold Mphasis; target of Rs 347: KRChoksey

KRChoksey has recommended hold rating on Mphasis with a target of Rs 347, in its December 1, 2011 research report.

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KRChoksey has recommended hold rating on Mphasis with a target of Rs 347, in its December 1, 2011 research report.

"Mphasis's revenue (adjusted for reversal of credit note of Rs.66.5 crore in Q3FY11 and deferment of revenue booking of Rs.34.6 crore due to incomplete documentation in the previous quarter) declined by 2.8% on QoQ basis to USD272.1 million (excluding revenue of USD4.1 million from Wyde- company acquired w.e.f. Sept 2011). Dip in revenue was led by weakness in HP channel which declined by 7.6% (adjusted for reversal of credit note and deferment of revenue in Q3FY11) to USD170.2 million in Q4FY11. Whereas, revenue from direct channel increased by 8.2% QoQ to USD101.8 million in Q4FY11 (excluding revenue from Wyde acquisition)."

"The management expects revenue from HP -non enterprise segment to increase from USD35 million in FY12 to around USD100 million in FY13E based on successful completion of couple of pilot projects it has undertaken in recent past and expect the same to result into huge business opportunities in coming quarters. Moreover, it expects revenue from HP enterprise segment to stabilize, going forward. However, taking into account macro concerns in developed economies we believe HP enterprise business will be adversely impacted and hence Mphasis being HP's subcontractor will in turn might face pressure in FY12E. Moreover, dip in open position in both Application and ITO segment to 700 and 300, respectively; despite decline in total employees by 1040 QoQ (including around 200 employees from Wyde) to 40,426 in Q4FY11 indicates lack of visibility in respect of new projects from both HP and Direct channels."

"EBTIDA margin (after adjusting for net onetime revenue of Rs.31.9 crore in Q3FY11 and reversal of provision for expenses of Rs.26.6 crore in Q3FY11) increased by 405 bps QoQ to 18.5% in Q4FY11. Increase in margin was supported by Indian Rupee depreciation against US Dollar by 7.4% QoQ and significant improvement in blended utilization rate - including trainees in BPO (by 400 bps QoQ to 70%) and ITO (by 500 bps QoQ to 80%) in Q4FY11."

"The management has indicated that the board might utilize its net cash balance of Rs.1773 crore for further acquisition especially in Banking & Capital segment rather than utilizing the cash balance for buy-back purpose as it had indicated earlier. Considering, significant correction in Mphasis' s price (-8.11% return) especially versus BSE IT index (+8.6% return) over the span of last 3 months and its huge cash balance (constitutes around 27% of the company's market capital), we believe there is limited downside to the stock's price from the current level and hence upgrade our recommendation to "HOLD" with target price of Rs 347 per share by assigning multiple of 10 times (i.e. 10% discount to target multiple for peer sets) to its FY12E EPS of Rs.34.7," says KRChoksey research report.

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To read the full report click on the attachment