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Mphasis: Top up, bottom down - Views on News from Equitymaster
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Mphasis: Top up, bottom down
Jan 31, 2008

Performance summary
  • Topline grows 5% QoQ during 3QFY08, aided by growth in volumes and billing rates.

  • Operating margins contract by 0.4% QoQ, mainly due to higher direct costs (as percentage of sales).

  • PAT contracts by 0.1% QoQ due to pressure at the operating level.

Consolidated financial performance: A snapshot…
(Rs m) 2QFY08 3QFY08 Change 9mFY07 9mFY08 Change
Sales 6,017 6,323 5.1% 12,566 17,655 40.5%
Expenditure 4,938 5,218 5.7% 10,460 14,495 38.6%
Operating Profit 1,079 1,104 2.3% 2,106 3,160 50.1%
Operating Profit margin (%) 17.9% 17.5%   16.8% 17.9%  
Other income (15) (28)   (53) (189)  
Depreciation 340 374 10.0% 732 1,019 39.3%
Profit before tax 724 702 -3.0% 1,321 1,952 47.8%
Tax 61 40 -34.8% 148 113 -23.7%
Profit after tax/(loss) 663 663 -0.1% 1,172 1,839 56.9%
Net profit margin (%) 11.0% 10.5%   9.3% 10.4%  
No. of shares (m)         210.2  
Diluted earnings per share (Rs)*         8.9  
P/E ratio (x)*         25.8  
*On a trailing 12 months basis

What has driven performance in 3QFY08?
  • Mphasis recorded a 5% QoQ growth in topline in 3QFY08. Increase in existing business volumes coupled with addition of new clients have led to the growth in revenues during the quarter. Appreciation in rupee impacted the topline to the tune of 2.4% (Rs 80 m). EDS now contributes to 52% of revenues (49% in 2QFY08). Barring this, there has been a sequential decline in non-EDS business in absolute as well as percentage terms. The company has attributed this to seasonality in the business, lower billing days and employees taking vacation. The company added 11 new clients through the EDS channel. The company added 2,158 employees during the quarter while the utilisation rates declined in all businesses owing to increase in capacity to cater to future growth.

  • Mphasis operating margins contracted by 0.4% QoQ in 3QFY08. This was mainly due to rise in direct costs. The cost of revenues represented 78.3% of revenues in 3QFY08 as against 76.3% of revenues in 2QFY08. Also, additional headcount and facilities built for future growth and increase in cost of software tools increased in cost of revenues. The rise in direct costs was however pared by lower selling expanses, which came down to 3% of revenues in 3QFY08 as against 4% in 2QFY08. However, the management has indicated that selling expenses will rise considerably in the coming quarters, as it will be investing in the sales force.

  • Mphasis’ profit after tax declined by 0.1% QoQ during 3QFY08. The decrease in operating profit, higher foreign exchange losses and lower interest income resulted in the lower net margin despite the lower income tax provision. The average effective tax rates for the company over the last three quarters has been at 5.5% which is not sustainable and going forward the tax rates will be in the range of 12% to 13%

What to expect?
At the current price of Rs 229, the stock is trading at a multiple of 25.8 times its trailing 12 months earnings. The performance over the nine months period is more encouraging as, during this period, the company has grown its topline and bottomline by 41% YoY and 57% YoY respectively. We shall soon update our research report on the company.

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