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Mphasis: Sounding caution - Views on News from Equitymaster
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Mphasis: Sounding caution
Oct 18, 2008

Performance summary
  • Topline grows by 13% QoQ during 2QFY09 mainly aided by higher growth in Application Service business.

  • Operating margins expand by 4% QoQ.

  • Bottomline grows by 79% QoQ during the quarter owing to higher other (investment) income.

  • Adds 20 new clients and 600 employees during 2QFY09. Employee base now stands at over 28,800.


Consolidated financial performance: A snapshot…
(Rs m) 1QFY09 2QFY09 Change 1HFY08 1HFY09 Change
Sales 7,422 8,361 12.6% 11,333 15,783 39.3%
Expenditure 6,176 6,591 6.7% 9,276 12,767 37.6%
Operating Profit 1,247 1,769 41.9% 2,056 3,016 46.7%
Operating Profit margin (%) 16.8% 21.2% 18.1% 19.1%
Other income 17 164 841.4% (161) 181
Depreciation 412 446 8.3% 645 857 32.9%
Profit before tax 852 1,488 74.5% 1,250 2,340 87.2%
Tax 62 77 23.0% 74 139 88.9%
Profit after tax/(loss) 790 1,411 78.6% 1,176 2,201 87.1%
Net profit margin (%) 10.6% 16.9% 10.4% 13.9%
No. of shares (m) 208.9 208.9 208.6 208.6
Diluted earnings per share (Rs)* 17
P/E ratio (x) 10.7
*Trailing twelve month earnings

What has driven performance in 2QFY09?
    • Mphasis registered a 13% QoQ growth in topline during 2QFY09. Increase in existing business volumes led to this growth in revenues during the quarter. The company has registered healthy performance across all its business verticals. While the ‘application service’ segment (64% of total sales) has recorded a growth of 14% QoQ, the BPO segment’s sales have grown by 6% QoQ. IT outsourcing services was the fastest growing segment during the quarter, recording a growth of 17% QoQ.

      Segmental Information
      (Rs m) 1QFY09 2QFY09 Change
      Application revenues 4,709 5,378 14.2%
      % of total revenues 56.3% 64.3%
      PBIT margin (%) 19.5% 25.2%
      BPO revenues 1,637 1,728 5.5%
      % of total revenues 19.6% 20.7%
      PBIT margin (%) 25.0% 28.3%
      IT outsourcing revenues 1,076 1,255 16.6%
      % of total revenues 12.9% 15.0%
      PBIT margin (%) 22.4% 27.1%

    • Despite the ongoing financial crisis in the US and UK, Mphasis recorded a 22% QoQ growth in the ‘BFSI’ (banking, financial services and insurance) vertical, which accounts for 43% of its total sales. The ‘Logistics, Airlines and Transporation’ vertical registered a growth of 22% QoQ whereas ‘Technology and OEMs’ segment reported a 4% growth. However, the ‘manufacturing and retail’ vertical reported a decline of 2% QoQ.

      Revenue break up
      1QFY09 2QFY09 Change
      I. Geography % Share (Rs m) % Share (Rs m) (QoQ)
      USA 67% 4,949 68% 5,650 14%
      Europe 19% 1,385 19% 1,620 17%
      Asia Pacific 5% 357 5% 397 11%
      India and Middle East 10% 731 8% 694 -5%
      Total 100% 7,422 100% 8,361 13%
      II. Verticals
      BFSI 40% 2,962 43% 3,607 22%
      Technology and OEMs 24% 1,812 23% 1,883 4%
      Telecom 12% 859 11% 960 12%
      Manufacturing and retail 15% 1,116 13% 1,098 -2%
      Logistics, Airlines and Transporation 5% 387 6% 474 22%
      Healthcare and Pharma 4% 286 4% 339 19%
      Total 100% 7,422 100% 8,361 13%
    • Mphasis’ operating margins expanded by 4.4% QoQ during 2QFY09. The company was able to grow its margins on account of better utilisation in offshore and onsite projects and higher volumes.

    • The net profit for the company increased by 79% QoQ during the 2QFY09. This was on account of strong topline growth and higher other income, which multiplied almost 9 times sequentially. This high other income was on account of dividend income earned from investment in debt funds.

    What to expect?
      At the current price of Rs 177, the stock is trading at a multiple of 8.3 times our estimated FY11 earnings. Mphasis’ 2QFY09 performance has been satisfactory. However, amidst the ongoing financial turmoil, the company is cautious about the scenario going forward. The management has indicated that they have witnessed delay in decision making while awarding contracts from the clients’ side. However, they have not seen any kind of cancellations. The management has indicated that company is expected to grow on the back of its strong performance in the application service and IT outsourcing businesses. The company is also enhancing its geographic coverage in Australia and China (especially in the BFSI segment from which the company currently derives majority of revenue from the US).

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