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Mphasis: Application service leads the way
Jul 29, 2008

Performance summary
  • Topline grows 13% QoQ during 1QFY09 aided by higher growth in Application Service business.
  • Operating margins expand by 1.1% QoQ.
  • Bottomline growth by 11% QoQ during the quarter; growth slower than that in operating profits owing to higher tax outgo.
  • Adds 28 new clients and 1,206 employees during 1QFY09. Employee base now stands at over 28,250.

Consolidated financial performance: A snapshot…
(Rs m) 4QFY08 1QFY09 Change
Sales 6,576 7,422 12.9%
Expenditure 5,542 6,176 11.4%
Operating Profit 1,033 1,247 20.6%
Operating Profit margin (%) 15.7% 16.8%  
Other income 59 17  
Depreciation 382 412 7.7%
Profit before tax 710 852 20.1%
Tax (5) 62  
Profit after tax/(loss) 714 790 10.6%
Net profit margin (%) 10.9% 10.6%  
No. of shares (m)   208.9  
Diluted earnings per share (Rs)*   14  
P/E ratio (x)   15.5  
*Trailing twelve month earnings

What has driven performance in 1QFY09?
  • Mphasis recorded a 13% QoQ growth in topline during 1QFY09. Increase in existing business volumes coupled with addition of new clients has led to this growth in revenues during the quarter. The company has registered healthy performance across all its business segments during the quarter. While the ‘application service’ segment (63% of total sales) has recorded a growth of 13% QoQ, the BPO segment’s sales have grown by 8% QoQ. IT outsourcing service’s sales have grown by 20% QoQ during the quarter.

    Segmental Information
    (Rs m) 4QFY08 1QFY09 Change
    Application revenues 4,163 4,709 13.1%
    % of total revenues 63.3% 63.4%  
    PBIT margin (%) 18.6% 19.5%  
    BPO revenues 1,513 1,637 8.3%
    % of total revenues 23.0% 22.1%  
    PBIT margin (%) 27.7% 25.0%  
    IT outsourcing revenues 900 1,076 19.5%
    % of total revenues 13.7% 14.5%  
    PBIT margin (%) 18.4% 22.4%  

  • Amidst on going credit crisis in the US, Mphasis recorded a decent 16% QoQ growth in the ‘BFSI’ (Banking financial Service insurance) vertical, which accounts for 40% of its total sales. The ‘manufacturing and retail’ vertical registered a healthy growth of 28% QoQ, and technology and OEMs segment reported a 11% growth.

    Revenue break up by
      4QFY08 1QFY09 Change
    I. Geography % Share (Rs m) % Share (Rs m)  
    USA 65% 4,277 67% 4,949 16%
    Europe 21% 1,391 19% 1,385 0%
    Asia Pacific 5% 309 5% 357 16%
    India and Middle East 9% 599 10% 731 22%
    Total 100% 6,576 100% 7,422 13%
               
    II. Verticals          
    Banking and financial services 39% 2,560 40% 2,962 16%
    Technology and OEMs 25% 1,629 24% 1,812 11%
    Telecom 14% 890 12% 859 -3%
    Manufacturing and retail 13% 875 15% 1,116 28%
    Logistics, Airlines an Transporation 7% 431 5% 387 -10%
    Healthcare and Pharma 3% 191 4% 286 50%
    Total 100% 6,576 100% 7,422 13%

  • Mphasis’ operating margins expanded by 1.1% QoQ during 1QFY09. The company was able to grow its margins on account of better utilisation in offshore and onsite projects and higher volume. However, margins were negatively impacted by an accelerated amortisation of visa costs (which amounted to Rs 93 m during the quarter).

  • Mphasis’ profit after tax increased by 11% QoQ during the quarter. This was on account of strong topline growth and maintenance of operating margins. However, a higher tax outgo negatively impacted the net profit margin. The higher tax outflow during the quarter was mainly because of lower deferred tax assets recognised during the quarter and completion of tax holiday for few licenses. Net profit was also affected by the net loss on foreign exchange resulted from higher forward contract losses. However, forex losses were partially offset by gains from the rupee’s depreciation against the US dollar during the quarter.

What to expect?
At the current price of Rs 210, the stock is trading at a multiple of 15.5 times its trailing 12-months earnings. Mphasis’ 1QFY09 performance has been satisfactory. The management expects the company to grow strongly in the future on account of its relationship with EDS. The company is building up capabilities in the BPO segment and is also planning to move up the value chain and enter the KPO (Knowledge Process Outsourcing) business. The management has also indicated that inspite of delay in decision making while awarding contracts from the clients’ side, it does not see any kind of contact cancellation and expects pricing to be stable to northward going forward. We shall soon update our research report on the company.

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