Mphasis has done it again! Lowered its guidance for FY02. Initially the company had given a guidance of US$ 100 m (consolidated numbers) in revenues for the current fiscal. This guidance had been earlier lowered to ‘inline with industry leaders’. Taking Infosys’ 30% as the benchmark, the expectations were that revenues would be in the range of US$ 75 m to $ 80 m. However, according to the latest guidance given by the company revenues for FY02 will be same as that for FY01, US$ 64 m (Rs 3 bn) and this is including revenues from MsourceE, the company’s subsidiary into the call centre business.
MsourceE has been showing a strong growth. For the 1QFY02 its recorded revenues of Rs 37 m (US$ 0.8 m) compared to Rs 27 m (US$ 0.6 m) in 4QFY01. This translates to a growth of 35% sequentially. The company is expecting a 20% sequential quarterly growth for MsourceE during the year. This would translate to a 275% growth for FY02. Frost & Sullivan a market research firm has projected a 30% growth for the call centre business in India for FY02. The size of the call centre industry is expected to grow from US$ 185 m (Rs 9 bn) in FY01 to US $ 224 (Rs 10 bn) m in FY02.
Revenues excluding MsourceE
Considering MsourceE to grow at this rate, and Mphasis earns as much as it did in FY01 US$ 64 m, the software business will actually post a 5% decline compared to FY01. However, the company has indicated its EBIDTA margins (10% for FY01) will grow by 50% in FY02.
This company’s disappointing performance is due to the fact that all its customers in the US are delaying or canceling projects. According to the management there was pressure on volumes (the company was not getting new projects) during the initial part of FY02 and now there is pressure on pricing too (in terms of lower billing rates).
Mphasis is carrying out a restructuring of its operations in Europe including the closure of its healthcare product line. This product line related to BFL-GmbH, the German subsidiary of the erstwhile BFL Software Limited. The company is discontinuing its operations in the area keeping with the group strategy of concentrating on software solutions and services. The European business would now be divided into two separate strategic business units. The Netherlands business will be treated as a mature business with higher revenues and margin targets. The pan European business will operate out of Germany and the UK will be considered as a new market entry. Restructuring cost is expected to be approximately half a million dollars.
At the current market price of Rs 83, the stock is trading at a P/E multiple of Rs 6 times its FY01 annualised earnings. Considering that others in the software sector are confident of posting growth in the region of 30%, Mphasis performance is quite unimpressive.
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