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Mphasis: Banking vertical leads the growth - Views on News from Equitymaster
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Mphasis: Banking vertical leads the growth
Mar 5, 2009

Performance summary
  • The company has changed its financial year from April-March to November-October with effect from 1st November 2008. This change has been made to align with the financial quarters and year of HP, after the merger of EDS with HP. It should be noted that EDS is a majority shareholder in Mphasis.
  • Net sales grow by 9% QoQ during 1QFY09 (November 2008 to January 2009) mainly aided by higher volume growth.
  • EBIT (earnings before interest and tax) margins expand by 2.7% QoQ largely on account of cost containment.
  • Net profits grow by 15% QoQ during the quarter owing to expansion in operating margins and higher other income.
  • Adds 9 new clients and 1,193 employees during 1QFY09. Employee base now stands at almost 30,000.


Consolidated financial performance: A snapshot…
(Rs m) 4QFY08 1QFY09 Change
Sales 8,947 9,777 9.3%
Expenditure 7,254 7,671 5.7%
Other income 8 16 105.2%
EBIT 1,701 2,122 24.7%
EBIT margin (%) 19.0% 21.7%
Interest (8) (18)
Forex gains / (losses) 175 31
Profit before tax 1,884 2,170 15.2%
Tax 54 70 31.0%
Profit after tax/(loss) 1,830 2,100 14.7%
Net profit margin (%) 20.5% 21.5%
No. of shares (m) 208.9
Diluted earnings per share (Rs)* 40.2
P/E ratio (x) 4.2
*1QFY09 annualised earnings

What has driven performance in 1QFY09?
  • Mphasis registered a 9% QoQ growth in topline during 1QFY09. The company has registered healthy performance across all its business verticals. While the ‘application service’ segment (65% of total sales) has recorded a growth of 11% QoQ, the IT Outsourcing segment grew by 20% QoQ. However BPO segment’s sales have declined by almost 2% QoQ during 1QFY09. Amidst the ongoing financial and economic crisis, Mphasis recorded a 27% and 6% QoQ growth in revenues from its European and US operations respectively. The ‘BFSI’ (banking, financial services and insurance) vertical, which accounts for 43% of total revenues recorded growth of 7% QoQ.

    Revenue break up
    4QFY08 1QFY09 Change
    I. Geography % Share (Rs m) % Share (Rs m) (QoQ)
    USA 69.0% 6,174 67.0% 6,550 6.1%
    Europe 19.0% 1,700 22.0% 2,151 26.5%
    Asia Pacific 4.0% 358 4.0% 391 9.3%
    India and Middle East 8.0% 716 7.0% 684 -4.4%
    Total 100.0% 8,947 100.0% 9,777 9.3%
    II. Verticals
    BFSI 44.0% 3,937 43.0% 4,204 6.8%
    Technology and OEMs 23.0% 2,058 25.0% 2,444 18.8%
    Telecom 11.0% 984 9.0% 880 -10.6%
    Manufacturing and retail 12.0% 1,074 13.0% 1,271 18.4%
    Logistics, Airlines and Transporation 6.0% 537 5.0% 489 -8.9%
    Healthcare and Pharma 4.0% 358 5.0% 489 36.6%
    Total 100.0% 8,947 100.0% 9,777 9.3%

  • Mphasis’ EBIT margins expanded by 2.7% QoQ during 1QFY09. The company was able to grow its margins on account of better utilisation in offshore and onsite projects and cost containment. It added 9 new clients including 6 relationships through HP during the quarter ended January 2009.

  • The net profit for the company increased by 15% QoQ during the 1QFY09. This was on account of strong topline growth and higher other income, which almost doubled in this quarter. This high other income was on account of dividend income earned from investment in liquid mutual funds.

What to expect?
At the current price of Rs 169, the stock is trading at a multiple of 4.2 times its annualised 1QFY09 earning. Amidst the ongoing financial crisis and economic recession in the developed economies, the company is cautious about the scenario going forward. The management has indicated that they have witnessed delays in decision making from the clients’ side. It has also mentioned that demand is slowing down. The management has indicated that it might face pressure on the pricing front going forward.

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