Reduce Mphasis: Emkay Global Financial Services

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Reduce Mphasis: Emkay Global Financial Services

Emkay Global Financial Services is bearish on Mphasis and has recommended reduce rating on the stock in its December 1, 2011 research report.

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RELATED NEWS Buy Kajaria Ceramics; target of Rs 130: Sushil Finance Buy Cera Sanitaryware; target of Rs 250: Sushil Finance Buy Crompton Greaves; target of Rs 132: IIFL ALSO READ See previous views by Emkay Global Financial Services See what other Experts & Brokerages are saying about MphasiS See messages about MphasiS Mphasis BSE | NSE 01/06/12 Are Mutual Funds betting on Mphasis?

Emkay Global Financial Services is bearish on Mphasis and has recommended reduce rating on the stock in its December 1, 2011 research report.

"Mphasis missed relatively modest expectations of flat US$ rev growth despite inorganic aid from Wyde acquisition with rev (ex hedging) declining by ~4% sequentially to US$ 276 mn. Revenue performance was impacted adversely by sharp declined in business from HP Channel to ~US$ 170mn (-3.5% QoQ in reported terms ,-11% QoQ adjusted for one off rev in July'11 qtr). However we note that both direct business and Non Enterprise business within HP grew by ~10%/16% QoQ in US$ terms albeit on a low base. Op margins declined by ~150 bps QoQ to 17.9% despite a 7.5% QoQ currency depreciation and improvement in utilization across segments impacted adversely by revenue declines. Profits at Rs 1.8 bn missed Emkay estimates (Rs 2.2 bn) on account of lower op performance and lower forex gains at Rs 199 mn (V/s est of Rs 459 mn). HC declined for the 2nd quarter in a row to ~40,400(-840 QoQ) with most of the sequential declines in the BPO business yet again."

"Rev from the HP channel declined by ~11% sequentially with business from HP Enterprise Svcs declining by 4.5% (ex one off rev in July'11 qtr) while direct business continued it's impressive growth at +11% seq growth (albeit on a low base). Discussions with co management indicate that new reporting structures at parent HP should lend stability to business from Enterprise Svcs ahead while Mphasis continues to explore business opportunities in other business units within HP as well as grow the direct business aggressively (note that direct business saw a 23% YoY growth in US$ terms in FYOct'11). We thereby pare down an already modest rev expectations further and hence build in <5% US$ rev growth for the company in FY Oct'12 now."

"A 9% raise in Oct'12E earnings to Rs 35.4 is triggered solely by lower currency resets (to Rs 48/$ V/s Rs 45/$ earlier) despite further cuts in our revenue estimates. Valuations at ~9/8x Oct'12/Oct'13 P/E with cash at ~27% of current market cap will limit sharp absolute downsides for Mphasis, however we see no end to op challenges (read anemic revenue growth) for Mphasis albeit a weak currency should help alleviate sharp downside risks to margins in the near/medium term. REDUCE, TP Rs 325, says Emkay Global Financial Services research report.

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To read the full report click on the attachment