Reduce MphasiS; target of Rs 360: Emkay

“Mphasis management indicated that revenues from HP Channel continued to remain under pressure despite a ~40% decline in qtrly rev run rate from HP over the past 7 qtrs and expects ~4-5% QoQ decline in HP ES rev over the next 2-3 qtrs. Co indicated that frequent leadership changes at HP along with the HP losing business when existing contracts are coming up for renewal is driving pressure at business from HP. A potential pricing cut at the upcoming MSA renewal at Oct ’12 end (gets renegotiated every 3 yrs) remains a concern on the street, however mgmt cited that it has not relented to pressure to cut prices in the past 2 yrs and indicated that it remains committed to protecting Mphasis’s interests ahead.”

“Mphasis’s Direct business has done well through the past few qtrs (5%+ US$ rev CQGR through the past 6 qtrs albeit overall financial performance remains dwarfed with the sharper declines at HP) and contributed to ~45% of rev in QJuly’12 (V/s 31% in Q Jan’11 qtr). Co’s senior level hiring in North America and Banking/Cap Markets has helped drive this traction with co currently chasing 3 large deals (TCV of US$ 20 mn+) currently. We note that Mphasis would report a 20%+ YoY growth in Direct channel rev in FYOct'12 and remains reasonably confident of growing Direct Channel by ~15% YoY in FYOct'13E.”

“Valuations at ~10x FYOct’12/Oct’13E P/E are inexpensive with cash at ~27% of Mkt cap limiting any sharp downsides. Mgmt has done well to grow the direct business decently albeit overall financial performance remains dwarfed by sharp declines in HP business. Our FYOct’12/Oct’13E are upped by ~2/4% to Rs 37.6/37.5 driven by lower currency resets despite further moderation in revenue estimates. We also introduce FYOct’14E EPS at Rs 37.6. Roll over to FYOct’14E earnings drives a raise in TP to Rs 360 (V/s Rs 340 earlier). In our view a step increase in dividend payout to ~40% (company mulling the option given that cash generation has remained healthy) could be positive,” says Emkay Global Financial Services research report.

Public holding more than 90% in Indian cos

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