Hold Mphasis, target of Rs 650: Emkay Global

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Emkay Global Financial Services has recommended hold rating on Mphasis with a target of Rs 650, in its November 20, 2009 report.

"Mphasis has remained our top pick in the IT Services sector for >2 yrs now with our 'Best Demand' thesis reinforced by superlative revenue growth (note Mphasis will close Oct'09 with ~20% YoY revenue growth) which has driven a sharp rerating and a 300%+ run up in the stock over the past 12 months. Although we increase our Oct '10 US$ revenue/ EBITDA/EPS estimates by ~5%/6.1%/14.5% to US$ 1,050 mn (+19.3% YoY growth, revenue growth estimates would still be the highest in our coverage universe), Rs 13 bn, Rs 49 respectively, we believe that current valuations at ~15x Oct'10E earnings leave little room for upside surprise (albeit in our view risks are on the downside from a possible INR appreciation, adverse price concessions from the business sourced via the parent channel etc)."

"Further we also build in a scenario analysis trying to estimate a Best Case Oct'10 EPS scenario of ~Rs 53 which assumes (1) 5% QoQ growth over Sept'09E quarterly revenues of US$ 240 mn(+3.8% QoQ) for the next 4 quarters, (2) 27% operating margins (downside risk to margin assumptions on a/c of wage increments, currency appreciation, note that Mphasis has the highest sensitivity to US$/INR rate given the higher proportion of offshore revenues as compared with peers at ~75%, every 1% move in US$/INR impacts mgns by ~55-60 bps) and (3) effective tax rates of 7% for FY10 (risks on the tax front hinge on the upside) (further we assume an exchange rate assumption of Rs 47/$). Valuations at ~14xBest Case Oct'10 EPS in our view leave little room for positive surprises. (refer calculation below).We thereby cut our rating one notch to HOLD (V/s ACCUMULATE earlier) with a revised 1 yr forward price target of Rs 650, based on 12x Oct '11E earnings of Rs 53.8 (V/s Rs 560 earlier). We clearly see downside risk to stock price in the near term and would look at better entry points," says Emkay Global research report.

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