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Mphasis: Good show

Oct 16, 2001

Mphasis-BFL has posted a 2% sequential growth in revenues and a significant 54% growth in net profits (QoQ) for 2QFY02. The stellar growth in profits is due to a large other income component. However, the most positive aspect of the result is that the company has significantly increased its operating margins. The operating margins have jumped from 23.4% in 1QFY02 to 29.1% in 2QFY02. On a YoY basis the company’s topline has grown by 7% and the bottomline has jumped by 175%. The steep rise in bottomline is due to a significant increase in operating margins, which was in the region of 17% in 2QFY01.

While the company has reported total expenditure for the quarter at Rs 305 m, the break up is Rs 265 m for software development expenses and Rs 52 m for administration. This two heads add up to Rs 317 m. However, Mphasis has written back Rs 14 m against a provision for e-structuring. Excluding the write back the company’s operating margins would have been 25%.

(Rs m)1QFY022QFY02Change
Sales4224301.8%
Other Income921133.4%
Expenditure324305-5.9%
Operating Profit (EBDIT)9912526.8%
Operating Profit Margin (%)23.4%29.1%-
Interest 11-39.3%
Depreciation31310.2%
Profit before Tax7511551.7%
Tax10-65.9%
Profit after Tax/(Loss)7411453.9%
Net profit margin (%)17.6%26.5%-
Diluted number of shares15.815.8-
Diluted Earnings per share*18.828.953.9%
P/E - 3.0-
*(annualised)---

Mphasis had earlier kept aside an amount of Rs 28 m for re-skilling its employees. Of this, it spent Rs 14 m for this purpose in 1HFY02. The company feels that it has accomplished what it set out to do in this area and therefore, will not require the remaining amount (Rs 14 m), which has been written back in the current quarter. However, the move could be on the back of a tough economic environment. All companies are cutting down on their costs, and training is one of the areas that have been the first to take a hit. Also, as client focus their IT spending on mission critical activities like maintenance, demand for new skill sets has taken a backseat. Therefore, companies can afford to delay training in these areas.

The company has also managed to cut corners. The software development expenses have shown a 5% decline sequentially. As a percentage of revenues the software development expenses have come down from 65% in 1QFY02 to 62% in 2QFY02.

Mpahsis’ performance is undoubtedly a good one. The stock is likely to see some upside to its valuations on the back of this performance. However, September 11 tragedies are likely to be felt in the third and the fourth quarter of FY02. Consequently, the markets are likely to be cautious, which will limit the upside. At the current market price of Rs 86, the stock is trading at a P/E multiple of 3 times its 2QFY02 annualised earnings.

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