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Mphasis: Strong numbers

Jan 22, 2002

Mphasis BFL has posted an 11% growth in revenues and a 19% growth in net profits, on a QoQ basis for 3QFY02. This translates to a YoY growth of 7% in topline (the figure has been restated for 3QFY00) and a 159% jump in bottomline.

(Rs m)2QFY023QFY02Change
Other Income2115-25.0%
Expenditure (includes depreciation) 336 3545.4%
Gross Profit (EBIT)9412330.7%
Gross Profit Margin (%)21.9%25.7% 
Profit before Tax11513820.7%
Profit after Tax/(Loss)11413518.6%
Net profit margin (%)26.5%28.4%-
Diluted number of shares15.815.8-
Diluted Earnings per share*28.934.218.6%
P/E - 12.8-

The company’s operating margins have improved sharply on a QoQ and YoY basis. The gross margins (EBIT) for Mphasis BFL Limited have jumped from 22% in 2QFY02 to 26% in 3QFY02. This is mainly due to company controlling the direct costs and selling expenses. The increase on a YoY basis is very steep, the margins have improved from a dismal 11% in 3QFY01. The number for depreciation has been included in total costs and have not been stated separately and therefore, we have used gross margins in place of operating margins.

Mphasis BFL groupOn a consolidated basis, the revenues have shown a 5% growth (QoQ) and the bottomline has risen significantly by 45%. The numbers translates to a marginal decline in topline and a sharp 113% growth in net profits, on a YoY basis.

The steep rise in net profits is due to low cost of revenues and depreciation charge declining sharply in the third quarter. The company has managed to control its employee costs by restructuring salaries and increasing the variable component. The operating margins have climbed from 15% in 3QFY01 to 18% in 3QFY02. Also, the company has managed to tightly control its selling expenses that have declined by about 10% sequentially.

(Rs m)2QFY023QFY02Change
Other Income3519-46.8%
Expenditure 657 6590.3%
Operating Profit (EBDIT)10514436.9%
Operating Profit Margin (%)13.8%18.0% 
Interest - -  
Depreciation 52 31 -39.7%
Profit before Tax8913248.1%
Profit after Tax/(Loss) 89 129 45.4%
Net profit margin (%)11.6%16.1%-
Diluted number of shares15.815.8-
Diluted Earnings per share*22.532.745.4%
P/E - 13.5-

Mphasis added 10 new clients during the quarter. The company’s client concentration has shown a sharp drop with the contribution to revenues from top ten clients coming down from 71% in the preceding quarter to 65%. The revenues from the top client have shown a significant dilution coming down from 16% in 2QFY02 to 12%. This could indicate that new clients, the company has added have contributed significantly to the revenues during the quarter. However, the number of one million dollar and five million dollar clients has remained unchanged as compared to the previous quarter.

The contribution of offshore revenues has gone up from 45% in 2QFY02 to 46%. While the company saw onsite billing rates improvement (5%, QoQ), the offshore realisations declined (5%, QoQ). The utilisation improved sharply for the offshore projects. The average utilisation rates have gone up from 68% to 75%.

However, contrary to the trends seen in the sector, the contribution of time and material projects increased sharply from 67% in 2QFY02 to 72% in 3QFY02. This is at a time when most software companies have seen the share of fixed price projects increase. This is due to the fact that the clients are looking at ways to control IT spending. Fixed price projects provide a price ceiling for IT projects.

The US geography showed a strong growth of 11%. The other geographies that grew were India & Middle East and Asia Pacific. Revenues from Japan and Europe declined sequentially. While most of the software companies share of revenues from the US has declined, Mphasis is one of the very few that has actually managed to increase the contribution to its revenues from the geography. While this is undoubtedly a commendable achievement considering the current economic environment, but it increases Mphasis’ exposure to the sluggish US economy.

The financial services vertical that has the largest share of the company’s revenues saw a 5% sequential decline. This was offset by the strong growth in other verticals like retail, logistics & transportation and technology. One of the largest clients for the company from the technology vertical is Compaq. The numbers seem to indicate that revenues from Compaq have shown a healthy growth. Digital that derives about 85% of its revenues from Compaq posted 8% sequential growth in revenues for 3QFY02. However, falling hardware sales have been taking toll on Compaq’s financials and therefore, this vertical might show signs of weakness in the future.

Financial services41.8%37.9%-4.5%
Retail, logistics and transportation21.5%25.0%22.4%
IT enabled services10.5%10.1%1.0%

MSourcE, the company’s call centre subsidiary grew by 7.5% sequentially to clock Rs 58 m in revenues for 3QFY02 (7% of revenues). MsourcE has about eight active customers of which two were added in 3QFY02.

The company has revised its revenue guidance upwards marginally to US$ 64 m. This implies a 7% growth in topline for FY02. For FY03 the company has given a guidance of 25% to 30% growth in topline and a growth of 60% to 70% in bottomline. At the current market price of Rs 440, the stock is trading at a P/E multiple of 14x its 3QFY02 annualised earnings. The stock is likely to see a further upside considering the strong earnings guidance. Before considering the company as an investment opportunity, the investors must recollect that the management has given a similar guidance of about 60% for FY02 and will close the year with a 7% growth. This is way below the sector average of 20%. However, if the US economy turns around in FY03, the company might be able to meet its projected earnings.

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