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Mphasis BFL: Improving bottomline

Apr 9, 2002

Mphasis BFL’s (standalone) 4QFY02 and FY02 numbers highlight the benefits of the aggressive cost cutting measures undertaken by the management. While the topline for the company has not shown impressive growth, the rise in net profit figure is significant. For 4QFY02, the company has posted a sequential (QoQ) growth of 1% in revenues and a steep 26% rise in net profits. This is on the back of operating margins jumping from 26% to 32%. The feat has been achieved due to a sharp decline in general and administrative expenses. On a YoY basis, the revenues for 4QFY02 have declined by 1%, while the net profits have jumped by 92%.

(Rs m) 3QFY02 4QFY02 Change FY01 FY02 Change
Sales 477 481 1.0% 1,737 1,808 4.1%
Other Income 4 7 95.9% 24 28 15.7%
Expenditure 354 326 8.6% 1,542 1,368 -11.3%
Operating Profit (EBDIT)** 123 156 26.7% 195 440 125.2%
Operating Profit Margin (%) 25.7% 32.3%   11.2% 24.3%  
Interest (12) (13) 14.7% (9) (37) 301.4%
Depreciation - -        
Profit before Tax 138 176 27.6% 228 505 120.9%
Tax 3 6 114.9% 23 11 -50.7%
Provision and contingencies - -   - -  
Profit after Tax/(Loss) 135 170 25.7% 206 493 139.8%
Net profit margin (%) 28.4% 35.3%   11.8% 27.3%  
Diluted number of shares 17.2 17.2   17.2 17.2  
Diluted Earnings per share* 31.5 39.6   12.0 28.8  
P/E (x)   15.4     21.2  
*(annualised)            
** Includes depreciation and amortisation of ESOPs

For the fiscal 02, the company has reported a mere 4% growth in revenues. However, the net profits have jumped by 140%. The operating margins have improved from 11% in FY01 to 24% in FY02. The company’s selling expenses have come down by 55% during the year. This is likely to have been achieved by eliminating the redundancy arising as a result of Mphasis and BFL merger.

Consolidated numbers
According to the consolidated numbers, the revenues for 4QFY02 have grown by 5%, while the growth in net profits have been lower at 3%. This is due a small decline in the other income figure and a sharp rise in taxes. The operating margins have improved due to the company managing to control its general and administrative expenses. On a YoY basis, the revenues have declined by a marginal 1%, while net profits have grown significantly by 79%.

MsourcE, Mphasis’s call centre subsidiary, clocked Rs 87 m in revenues for the 4QFY02. This translates to a QoQ growth of 50% (Rs 58 m). Its contribution to the consolidated revenues increased from 8% in 3QFY02, to 10% in 4QFY02. The sequential growth in revenues for the software services business (excluding MsourceE) is a mere 1%.

Mphasis closed the fiscal 02 with a small 15% topline growth. This is lower than the industry growth figure (expected to be in the range of 25%-28%). Revenue growth for the software services business is 8%, as the consolidated numbers include a 359% growth in MsourcE revenues. MsourceE earned Rs 234 m in FY02, increasing its contribution to the consolidated revenue from 2% in FY01 to 8%.

(Rs m) 3QFY02 4QFY02 Change FY01 FY02 Change
Sales 804 840 4.5% 2,733 3,133 14.6%
Other Income 9 8 -15.7% 21 50 139.2%
Expenditure 690 718 -3.9% 2,584 2,790 8.0%
Operating Profit (EBDIT)** 113 122 7.4% 150 344 129.5%
Operating Profit Margin (%) 14.1% 14.5%   5.5% 11.0%  
Interest (10) (10) -0.1% 6 (25) -503.5%
Depreciation - -   - -  
Profit before Tax 132 139 5.3% 164 419 154.9%
Tax 3 7 113.3% 28 10 -64.9%
Provision and contingencies - -   - -  
Profit after Tax/(Loss) 129 133 2.7% 136 409 200.6%
Net profit margin (%) 16.1% 15.8%   5.0% 13.1%  
Diluted number of shares 17.2 17.2   17.2 17.2  
Diluted Earnings per share* 30.1 30.9   7.9 23.9  
P/E (x)   19.8     25.6  
*(annualised)            
** includes depreciation and amortisation of ESOPs

The net profit figure has grown by a sharp 201% on the back of operating margins doubling from 5.5% to 11%. The growth net profit also includes a sharp rise in other income, a steep drop in taxes and a write back of Rs 14 m, which has been adjusted against the expenses. However, the company has incurred restructuring cost of Rs 25 m during the fiscal.

Mphasis’s revenue growth for FY02 mainly stemmed from the financial services vertical. The revenue growth in this segment was 15%. The growth was far subdued for the retail, logistics and transportation segments that grew by a small 3%. The technology segment grew by 1%. Infact retail logistics & transportation and technology segment witnessed a sequential decline in revenue for 4QFY02.

During the year the strongest growth came from the Asia Pacific region. Consequently, the contribution from the region grew from 6% to 8%. Japan too showed robust growth and the company earned 6% of its total revenues from the region. US continues to be the most dominant geography contributing 66% to the total revenues. The growth in revenues from the European geography was dismal at 4% for the whole year. The contribution from the European geography to the consolidated revenues is 14%. India and the Middle East contributed another 6%. For the 4QFY02, the revenues from Asia Pacific, India and the Middle East declined. Asia Pacific is expected to see a strong growth in demand for IT services. As a result most of the top run software companies have been focusing on this market. Intense competition could be the reason behind the decline in revenues from the region.

Other key numbers for the company moved in line with broader trends seen for the sector. The contribution of offshore revenue continued to increase. For 4QFY02, Mphasis earned 51% of the revenues (46% in 3QFY02) from offshore projects. This translates to a 15% sequential growth in offshore revenues. The onsite revenues declined by 5% sequentially during the quarter. Thus, contributing 49% to the total revenues for 4QFY02. For the full year the revenues from onsite projects declined marginally by 1%, while there was a significant 40% growth in offshore revenues. Consequently, the share of onsite revenues fell to 53% for FY02 as compared to 60% for FY01 and that for offshore revenue increased from 40% to 47% in FY02.

This is due to clients preferring to get work done offshore to avail cheaper billing rates. According to the company, the average billing rate for onsite projects works out to be US$ 60 per hour in FY02. This is a small decline (2%) from US$ 61 per hour for FY01. The offshore billing rates fell sharply from US$ 22 per hour in FY01 to US$ 19 per hour in FY02 (a decline of 14%). Thus, offshore billing rates are currently one third of the onsite billing rates.

A shift towards offshore projects is welcome by the software companies due to the fact the offshore projects have better operating margins, inspite the billing rates being lower. This is due to the employee and other expenses are much lower offshore compared to onsite. This could have been one of the key reasons for the sharp improvement in operating margins.

Other positives in the results were the decline in client concentration and improvement in utilisation rates in FY02 as compared to FY01. The group added 11 new clients during 4QFY02. Of these two were for the call centre subsidiary.

At the current market price of Rs 611, the stock is trading at a P/E multiple of 21x its FY02 earnings (standalone). The stock is likely to continue attracting the market’s eye due to the guidance of 200% revenue growth for the call centre business given by the management for FY03. Before considering the company as an investment opportunity, the investors must recollect that the management had given a similar guidance of about 60% for FY02 and finally closed the year with a 15% growth. This is way below the sector growth figure of about 25%. Also, the software services business that accounted for 92% of the revenues grew only by 8%.

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