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Mphasis: De-risking growth - Views on News from Equitymaster
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  • Jun 18, 2001

    Mphasis: De-risking growth

    Chrysalis Capital, in a deal worth Rs 450 m, has picked up a 7% stake in Mphasis BFL at Rs 350 a share. This is significantly higher (75%) than the current market price of Mphasis BFL. On June 14, 2001 Mphasis’s stock had jumped by 13% due to unconfirmed reports about the placement. However, the management had reserved its comments on the matter till its board meeting, which took place on Friday, June 15, 2001. After the board meeting the management made a formal announcement regarding the placement.

    Considering Mphasis BFL’s revenues of FY01 (only the listed entity’s numbers) the deal has been valued at a P/E multiple of 26 times its FY01 earnings. Presently the stock is quoting a P/E multiple of 15 times its FY01 earnings. The numbers of shares outstanding after the deal will be 17.1 m up from 15.8 m previously.

    Category % of total
    Resident Indians 5.25%
    Bodies corporate 73.40%
    Directors 0.06%
    Financial institutions 7.90%
    Foreign institutional investors 9.16%
    Non resident Indians 0.53%
    Mutual funds 3.59%
    Pending Identification 0.03%
    CD SIL 0.08%
    Total 100.00%

    Mphasis BFL has invited Mr. Ashish Dhawan, director of Chrysalis Capital, to join the board. According to Mr. Dhawan, Chrysalis picked up stake in Mphasis at such a significant premium, as it was happy with Mphasis’s strong business model. Also, Chrysalis had talked to the company’s clients and had found that the clients had ‘highest respect in the capabilities of Mphasis BFL’. Another interesting statement that Mr. Dhawan made was that Chrysalis was planning to buy additional shares of Mphasis from the market. Considering this fact the stock should have witnessed appreciation in the near term, but it has not.

    Bodies corporate Before 15th June 2001 After 15th June 2001
    Mphasis Holding Ltd.* 39.40% 36.45%
    Baring India Investments Ltd. 30.52% 28.23
    Chrysalis - 7.50%
    Others 1.32% 1.22%
    Total 71.24% 73.50%
    * Includes beneficial holding by Barings 9.00% 8.00%

    This could be because Mphasis does not seem very confident of its earnings guidance for FY02. Earlier, the company had estimated sales for FY02 to be in the range of US$ 100 m. This would have translated to a growth rate of about 54% over FY01 consolidated earnings. But at its board meeting on June 15, 2001 Mphasis indicated that its topline growth would be in line with the industry leaders. Infosys after its FY01 results had given a guidance of a topline growth between 30 to 35%. Considering this, Mphasis’s consolidated topline for FY02 could be in the range of US$ 85 m.

    Mphasis plans to use the funds, for strengthening its cash and working capital position. But the lion’s share will go for capital expenditure in MsourcE – Mphsais’s subsidiary that is into IT enabled services industry, primarily focused on help desks and call centers. According to figures released by Nasscom on the prospects of IT enabled services industry, customer interaction services (call centres and customer support centres) recorded fastest growth rate amongst all the segments. The segment has grown by 112% in FY01. By year 2003 the market for call centres is expected to be Rs 2,790 bn (US$ 60 bn). MsourceE contributes about 3% to Mphasis’s revenues. The contribution is expected to increase, as the call centre business is likely to show a faster growth rate than the software industry.

    The company’s move to strengthen its call centre business will certainly help bring pace to the topline growth. In the software business the company’s major revenue stream is the BFSI (banking financial services and insurance) vertical, in which almost every software company has a presence. Therefore, growth in this segment will always be a challenge. IT services business is still in a nascent stage and the demand supply gap is large. Therefore, consolidating on this business might just be the right mix Mphasis needs for a healthy growth.



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