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Mphasis: Application service aids growth - Views on News from Equitymaster
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Mphasis: Application service aids growth
May 3, 2008

Performance summary
  • Topline grows 38% YoY during FY08, 4% QoQ in 4QFY08. Growth during the fiscal aided by higher volumes and improvement in billing rates.

  • Operating margins remain flat for the fiscal, decline by 1.8% QoQ for the fourth quarter due to lower utilisation in onsite projects.

  • Bottomline grows by 42% YoY in the fiscal, aided by decline in tax outgo.

  • Adds 17 new clients and 811 employees during 4QFY08. Employee base now stands at over 27,000.

  • Recommends dividend of Rs 3.3 per share (dividend yield 1%).

Consolidated financial performance: A snapshot…
(Rs m) 3QFY08 4QFY08 Change FY07 FY08 Change
Sales 6,323 6,576 4.0% 17,606 24,231 37.6%
Expenditure 5,218 5,542 6.2% 14,546 19,997 37.5%
Operating Profit 1,104 1,033 -6.4% 3,060 4,234 38.4%
Operating Profit margin (%) 17.5% 15.7%   17.4% 17.5%  
Other income (28) 59   (60) (130)  
Depreciation 374 382 2.2% 1,017 1,442 41.9%
Profit before tax 702 710 1.1% 1,983 2,662 34.2%
Tax 40 (5) -111.4% 182 109 -40.4%
Profit after tax/(loss) 663 714 7.8% 1,801 2,553 41.8%
Net profit margin (%) 10.5%     10.2% 10.5%  
No. of shares (m)       209.1 209.7  
Diluted earnings per share (Rs)*       8.6 12.2  
P/E ratio (x)         18.6  

What has driven performance in FY08?
  • Mphasis recorded a 38% YoY growth in topline during FY08. Increase in existing business volumes coupled with addition of new clients has led to this growth in revenues during the fiscal. All the three segments have registered healthy performance during the fiscal, with the ‘application service’ segment (65% of total sales) recording a growth of 32% YoY. The BPO segment sales grew by 29% YoY and IT outsourcing service segment sales grew by 114% YoY during the fiscal. Mpahsis added 17 new clients during the fourth quarter, which included a US-based manufacturing company, a technology company in Europe and a US-based retail company. The company also bagged an order from a banking company in the Asia-Pacific region in the BPO services segment. It added 811 employees during the quarter.

    Segmental Information
    (Rs m) FY07 FY08 Change
    Application revenues 12,002 15,811 31.7%
    % of total revenues 68.2% 65.3%  
    PBIT margin (%) 26.4% 22.5%  
    BPO revenues 4,215 5,441 29.1%
    % of total revenues 23.9% 22.5%  
    PBIT margin (%) 24.4% 24.9%  
    IT outsourcing revenues 1,390 2,979 114.3%
    % of total revenues 7.9% 12.3%  
    PBIT margin (%) 15.9% 19.5%  

  • Mphasis operating margins expanded by a mere 0.1% YoY during FY08 while the same contracted by 2% QoQ during the fourth quarter. The company was able to manage better utilisation for offshore business but recorded a decline in its onsite utilisation levels, which impacted profitability during 4QFY08. However, the management has indicated that utilisation will improve in the coming quarters, as it will be applying better control measures.

  • Mphasis’ profit after tax increased by 42% YoY during FY08. This was on account of strong topline growth, maintenance of operating margins and lower taxes. As a matter of fact, the company’s effective tax rate declined from 9.2% in FY07 to 4.1% in FY08. As for the impact of rupee 11% YoY appreciation against the US dollar, Mphasis dealt with the same by way of better utilisation of resources.

What to expect?
At the current price of Rs 227, the stock is trading at a multiple of 18.6 times its trailing 12 months earnings. While Mphasis’ FY08 performance has been satisfactory, the management expects to grow strongly in the future on account on the back of its relationship with EDS. The company is planning a US$ 70 m capital expenditure during FY09 to build up capabilities. We shall soon update our research report on the company.

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