Espirito Santo cuts MphasiS to 'neutral' from 'buy'

Moneycontrol Bureau

Portugese investment bank Espirito Santo has downgraded software services exporter MphasiS to "neutral" from "buy" saying the news reports that its parent Hewlett Packard was planning to sell its 61 percent stake in the company, as well as current fundamentals were now priced in, post the 31 percent run-up in the stock over last one month.

"While on the operational front things are looking brighter for MphasiS than a year back, with reducing client concentration, direct channel and non- HPES (HP Enterprises Services) segment growing faster, a current valuation of 12.9 times FY14E P/E restricts further upside, though strong free cash generation and a large cash balance in our view restrict the downside," analysts Soumitra Chatterjee and Nitin Padmanabhan said on Friday.

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To sustain current valuations, MphasiS will have to report double digit earnings growth from here on, which the analysts feel is unlikely.

"While 55 percent of the business (direct channel) continues to grow at better than NASSCOM growth expectations, 45 percent of the business (HP channel) continues to remain under pressure and brings the overall organic revenue growth down to 5 percent for FY14," the analysts said.

MphasiS on Wednesday said second quarter (Feb-April) consolidated net profit declined 7 percent year-on-year to Rs 177 crore, while revenue gained 6 percent to Rs 1,405 crore.

The fall in net profit was due to lower other income as the company deployed funds towards the acquisition of Digital Risk as well as towards the payment of dividend, it said.

MphasiS shares were down 2.5 percent at Rs 477 on NSE in afternoon trade on Friday.