Reduce Mphasis; target of Rs 325: Emkay

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Reduce Mphasis; target of Rs 325: Emkay

Emkay Global Financial Services is bearish on Mphasis and has recommended reduce rating on the stock with a target of Rs 325 in its December 12, 2011 research report.

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Emkay Global Financial Services is bearish on Mphasis and has recommended reduce rating on the stock with a target of Rs 325 in its December 12, 2011 research report.

"Mphasis mgmt indicates that business within core HP (read Enterprise Svcs) is expected to be sluggish (note that rev from Enterprise Svcs are down by ~10% over the past 2 qtrs) albeit stable ahead citing formation of a governance council at HP which is taking the relationship forward with Mphasis. Co continues to aggressively target opportunities within HP outside of Enterprise Svcs and is targeting rev of US$ 100 mn in FYOct'12( V/s US$ 35 mn in FYOct'11 implying a tough CQGR of 30%+). Mphasis has recently won a US$ 25 mn ACV business from HP Tech Svcs and expects to gain traction within HP Imaging and Printing Group as well. Strong growth within Direct Channel business is expected to continue (co has recently won 2 large deals in the emerging geographies, albeit we see working capital stretching on account of these deals). We highlight that co wide revenue growth for Mphasis might still be low single digits, far cry lower than industry/peers growth."

"Mphasis's EBITDA margins( ex one offs and hedging gains) have continued to decline since April'09 ( down ~1200 bps over the period) before recovering in Oct'11 qtr to 18.5% aided by lower currency, improved utilization and lower investments in the Javelina platform. Over the next few quarters, we see margin tailwinds in the form of (1) lower investments in the Javelina platform, (2) absence of RSU charge (co is now issuing ESOP's at current market price unlike in the past when RSU's were issued at face value), (3) broadening of employee pyramid(co has hired ~1,300 freshers in the past 2 qtrs and plans to hire ~1,600 freshers in FYOct'12) and (4) consolidation of delivery centers. However we note that currency depreciation will be a less meaningful margin tailwind for the company ahead on account of INR based billing for nearly 45% of revenues and hedges at ~Rs 48/$."

"Valuations at ~9x/8.5xOct'11/Oct'12 P/E with ~27% of market cap in cash will limit sharp downsides. Several quarters of disappointing performance has driven ~50% decline in stock over the past 1 yr. In our view, an improvement in operational performance needs to preclude any stock upsides, says Emkay Global Financial Services research report.

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To read the full report click on the attachment