Motilal Oswal neutral on Mphasis

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Motilal Oswal neutral on Mphasis

Motilal Oswal has maintained neutral rating on Mphasis with a target of Rs 320, in its December 1, 2011 research report.

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Motilal Oswal has maintained neutral rating on Mphasis with a target of Rs 320, in its December 1, 2011 research report.

"Mphasis (MPHL) posted a 3.8% QoQ decline in 4QFY11 revenue in US dollar terms due to a 12% QoQ decline in the HP channel (adjusting for one-off revenue in the previous quarter the decline in the HP channel would have been 3.8%). HP continues to be a drag on the business and is likely to take time before the management can make it meaningfully drive growth. HP accounts for 62% of the business. Operating margin of 14.7% was higher by 30bp compared with our estimate and PAT of INR1.83b was in line with our estimate due to a weaker rupee (average rate of INR48 v/s our estimate of INR47) and higher margins."

"The results will be perceived negatively by the market. While the net cash per share of INR90 and free cashflow of INR7b/annum could suggest limited downsides, Mphasis has been a story of consistent downgrades in earnings driven by pricing and volume pressure from the HP channel. Our interactions with the management suggest that revenues from HP could fall by 6.8% in FY12, despite USD70m incremental revenues from non-HPES. This implies that the HPES business could fall by 17% in FY12, while incremental business from non-HPES compensates the loss. The continued uncertainty in this business makes us watchful on the stock. We maintain a Neutral stance on the stock with a target price of INR320, which discounts our FY13E EPS of INR35.3 by 9x, the lower end of the valuation band for mid-caps (9-11x)," says Motilal Oswal research report.

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To read the full report click on the attachment