MphasiS sees continued decline in HP Enterprise business
Software services provider MphasiS expects Enterprises Services business coming via its parent HP will continue to decline over next few quarters before it hits stability.
August 30, 2012 / 16:36 IST
Moneycontrol Bureau
Software services provider MphasiS expects Enterprises Services business coming via its parent HP will continue to decline over next few quarters before it hits stability."We continue to see project ramp downs in HP enterprise services business. We expect that to continue for a few quarters," Ganesh Ayyar, CEO, said in a post earnings conference call on Thursday.MphasiS has suffered due to tough times at parent HP for more than a year now and the poor performance in the enterprise services business has hurt.In the third quarter (May-July) MphasiS' consolidated net profit rose 7% from a year ago to Rs 209 crore, while net sales were up just 5% to Rs 1,355 crore.According to Kotak Institutional Equities analyst Kawaljeet Saluja and Rohit Chordia, HP channel revenues declined 10.9% sequentially to USD 138.4 million, while direct channel revenues grew a muted 2.8% to USD 113.6 million. The analysts said that they had expected weak performance from the HP channel, but were surprised by the intensity of the decline."HP channel revenues have been weak for some time and may remain so; HP's global challenges are well-known and the management continues to guide towards sustained weakness in HP enterprise channel, which constitutes the bulk of Mphasis' HP channel revenues," Saluja and Chordia said.MphasiS has been focussing on reducing its dependence on HP and growing its direct business. Last quarter, its direct business revenue grew 48% year-on-year and 13% sequentially to Rs 633 crore in Q3. Its direct business now contributes 45% of total business, while the rest comes from HP. The direct vs HP mix was 42:58 in the second quarter and 33:67 in the year ago quarter.It added 24 new clients in Q3, of which 20 were in direct business.Ayyar said MphasiS continues to invest in new services and go-to-market in the direct business and deal pipeline is healthy, although predictability in deal closures is "choppy.""There is a lot of chatter in the market of banking, capital market and insurance (sectors) tanking. But we haven't seen that in our deal pipeline," he said.However, deal closures are getting longer and the visibility to that effect remains poor. Still Ayyar hopes that over the next 9-12 months, MphasiS will be able to deliver industry or above industry growth in its direct business.In the third quarter, the company gave an average salary hike of 3% to its on-site employees and 8% to its work force in India, according to Ganesh Murthy, CFO. But attrition rate still remains high at 20% among offshore employees.The company said it will keep a close watch on headcount and will only hire based on demand.Last year, for instance, it hired more than 1,000 freshers. But this year its going slow on that front. In the first nine months of its financial year, it has hired only 200-300 freshers and may add a similar number in the fourth quarter.According ot the Kotak analysts, while the net headcount grew by 458 last quarter, headcount in application and ITO (infrastructure technology outsourcing) divisions declined by 918."Sustained headcount decline and muted performance in the recent quarters do not offer much confidence on revenues from the direct channel," the analysts said.Meanwhile, the company's cash and cash equivalents increased by Rs 237 crore in Q3 to reach Rs 2,575 crore.The company will look at acquisitions to accelerate growth in new service areas. However, Murthy said the size of the acquisition will be limited to the cash availability as the company "doesn't want to leverage balance sheet to a large extent by taking debt."MphasiS shares were trading up 3.3% at Rs 380.15 on NSE in afternoon trade on Thursday. Kotak Institutional Equities has a "sell" rating on the stock, with a target price of Rs 355. Spark Capital also maintained its "sell" rating with Rs 350 target price, saying it "remains skeptical on outlook for revenue growth given the parent HP's strategy for services is not clear."Nomura and Enam have a "neutral" and "hold" rating on MphasiS respectively.Nachiket Kelkar
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