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MphasiS: Good show - Views on News from Equitymaster
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  • Oct 9, 2002

    MphasiS: Good show

    Mphasis BFL has announced encouraging consolidated 2QFY03 results. The company has reported a 15% growth in its revenues while its bottomline has grown by a steep 16% on a QoQ basis . Software service revenues of the company have grown by 7%, while its call centre subsidiary MsourcE has seen a 56% growth in revenues on a QoQ basis.

    (Rs m) 1QFY03 2QFY03 Change
    Net Sales 895 1,029 15.0%
    Other Income 13 (11) -189.5%
    Expenditure 757 835 10.3%
    Operating Profit (EBDIT) 138 194 40.7%
    Operating Profit Margin (%) 15.4% 18.9%  
    Interest (10) (6) -42.0%
    Depreciation - - -
    Profit before Tax 160 189 17.7%
    Extraordinary items -    
    Tax 22 27 25.7%
    Profit after Tax/(Loss) 138 161 16.5%
    Net profit margin (%) 15.5% 15.7%  
    No. of Shares 17.2 17.2  
    Diluted Earnings per share* 32.2 37.5  
    P/E Ratio   14.3  
    (* annualised)      

    Growth in topline has been mainly due to increase in volumes. Improved billing rates for both software services as well as call centre business have also contributed positively to the topline. Compared to US $64 last quarter Mphasis has improved its billing rates to US $66 in the September quarter for onsite business. The call centre subsidiary, on the other hand, has seen billing rates improve to US $13 from US $12 last quarter. The company, however has not been able to increase its billing rates for offshore volumes but has been able to maintain it at US $18.

    Revenues (Rs m) 1QFY03 2QFY03 Change
    Mphasis 750 806 7.5%
    % contribution 83.7% 78.3%  
    MsourcE 146 223 53.0%
    % contribution 16.3% 21.7%  
    Total 896 1,029  

    At the operating level, the company has been able to improve margins by 350 basis points to 19%. This was achieved mainly by reduction in employee costs, selling expenses and general and administartive expenses. The company's general and administrative expenses have reduced from 15% of revenues to 12% of revenues on a YoY basis. With better operating margins, lower interest and tax expenses Mphasis' net profits have gone up by 16%.

    Operating margins 1QFY03 2QFY03
    Mphasis 18.4% 21.0%
    MsourcE 6.0% 9.7%
    Consolidated 15.4% 18.9%

    Higher onsite revenues, mean lower margins in the software business. In 2QFY03 the company's onsite offshore revenue mix changed in favour of onshore projects and revenues from offshore projects have decreased to 33% compared to 41% 1QFY03. The company's onsite revenues on the other hand have gone up to 67% compared to 59% last quarter. This could have negatively impacted the companys operating margins. However, new projects generally kick off onsite. Therefore, increased in onsite ratio could aslo mean begining of new projects, which might be shifted offshore later in the future. The company has seen a significant reduction in employees for software services. Consequently, utilisation rates have gone up to 89% in the current quarter. The company's revenue dependence on its top ten clients has gone up in 2QFY03 to 69% compared to 63% last quarter. Division of revenues on the basis of verticals and regions have remained more or less the same.

    Mphasis' call centre business has done well in 1QFY03 with 53% QoQ and a 340% YoY growth in topline. Number of employee has gone up by nearly 600 and utilisation rates have increased. Consequently, this indicates good growth in business volumes. Division of revenues on the basis of verticals has remained more or less the same. On the other hand, revenues from US markets have reduced significantly to 89% compared to 94% in the previous quarter.

    During the quarter the company has added fourteen new clients including three in its call centre subsidiary. These include two large global electronics and communication companies, a bank in Japan, a large global financial services group, two large global insurance groups and a large global hardware giant. Eight of the new clients added are in the financial services sector.

    Mphasis' performance in the current quarter has been impressive and primarily a result of the break neck growth of its call centre subsidiary. The company has also been able to improve its margins significantly by various cost cutting measures as well as improvement in margins of its call centre subsidiary. Mphasis' call centre subsidiary had broken even on the net profit level in 1QFY03 and has been contributing incrementally to the bottomline of the consolidated entity. In the 2QFY03 Mphasis has sprung a surprise by beating its own 1QFY03 performance by a good margin. Going forward, we expect quarterly growth rates for FY03 to be robust on account of Msource. Having said that we must also point out that high growth seen in the call centre business should not be taken for granted i.e. negative surprises should not be ruled out.

    Mphasis' inability to increase revenues from offshore operations is not a good sign for a company that has margins lower than its peers. In the long run this factor may impediment the profitability of the company. Also if the company is not able to negotiate higher billing rates for offshore volumes, high onsite revenue concentration may put further pressure on margins. Higher reliance on top ten clients and the financial vertical in software services business are also a causes of concern. The stock is currently trading at Rs 535 a P/E multiple of 14x its annualised 2QFY03 earnings. The stock has run up considerably in the last three months indicating that expectations may have been already factored in.



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