Emkay Global Financial Services is bearish on MphasiS and has recommended reduce rating on the stock with a target of Rs 375 in its December 6, 2012 research report.
“Mphasis reported gross revenues at US$ 248 mn (-1.6% QoQ, note that they have continued to decline for 5 qtrs now) with HP Channel Revenues declining by ~3% sequentially while Direct channel revenues were flat QoQ. EBITDA margins however surprised +ively with ~100 bps QoQ improvement here to 20.7 %( highest in 6 quarters and ~120 bps higher than Emkay est) aided yet again with cost/headcount rationalization (refer charts below) with offshore apps/IMS utilization at unsustainable levels of 84%/87% respectively. Profits at Rs 2,092 mn came in better than expectations on account of better margins and higher other income.”
“Mphasis management indicated that it expects the Direct Channel (46% of overall revenues as of Oct’12 qtr) to grow 1.5x industry growth in FYOct’13 on an organic basis which we continue to see as aggressive, given industry wide growth challenges and relatively somber growth in the Direct channel in recent quarters (note that Direct channel revenues have grown at 0.2% CQGR through the past 3 quarters). While Mphasis management has done a creditable work at rationalizing costs and improving utilization through recent quarters, we believe that Mphasis’s operating metrics leave no scope to defend margins without revenue growth any further. Recently announced Digital Risk acquisition is a step in the right direction to reduce dependence on HP along with proving presence in a high growth segment, we see limited synergies in the near term.”
“We incorporate recently acquired Digital Risk into our estimates which leads to a 2/4.6% increase in our FYOct’13/Oct’14E earnings to Rs 38.3/39.4. While a raise in dividend payout to ~45% (Rs 17/share) appears exciting, we retain REDUCE on Mphasis with a revised TP of Rs 375 (V/s Rs 360 earlier) as we see no end to revenue pangs for the company with downside risks to co’s current margin profile ahead,” says Emkay Global Financial Services research report.
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