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Mphasis-BFL: What next? - Views on News from Equitymaster
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  • Dec 8, 2000

    Mphasis-BFL: What next?

    It has been quite interesting to watch Mphasis in 1QFY01 making a turn around and posting a net profit of Rs 23 m. But then this is not surprising given the fact the with the e-commerce boom, everybody is making money. Anyway, BFL bought Mphasis for that very particular reason.

    Mphasis is very focused. It has interests in only three segments finance, retail & logistics and technology. The list of clients from the financial services industry is very impressive, it includes Chase, ABN Amro, Citicorp, Standard Chartered, BNP, ING, Charles Schwab, ICICI, Fundix.nl, Chase.com and BizBase. Finance being one of the fastest growing verticals, it has caught a lot of attention.

    (Rs m) 1QFY01 2QFY01 Change 1QFY01 2QFY01 Change 2QFY01 3QFY01 Change
      Mphasis Polaris PSI Data Systems
    Sales 396 401 1.2% 519 630 21.2% 206 208 1.0%
    Other Income 10 12 23.1% 9 15 69.5% 2 1 -21.6%
    Operating profit (EBDIT) 50 68 35.4% 116 145 25.3% 47 50 6.3%
    Operating Profit Margin (%) 12.6% 16.9%   22.4% 23.1%   22.9% 24.1%  
    Profit after Tax/(Loss) 23 41 80.2% 110 140 27.2% 43 42 -2.9%
    Net profit margin (%) 5.8% 10.3%   21.2% 22.3%   21.0% 20.2%  
    Diluted Earnings per share* 5.8 10.5   25.9 32.9   23 22.3  
    P/E (annualsied 1HFY01)   58     18     16  

    Today we have Polaris, PSI Data System, Trigyn, SSI and a few others, all eyeing the same market. All of them have commendable track records in the area and have shown excellent growth.

    For Mphasis, compared to the interest in the financial services industry, its expertise in other areas is limited. For example, in the technology area one of its clients is Compaq, but today with Digital getting into the software business, Mphasis may lose out to the latter, as Digital is a 51% subsidiary of Compaq. Digital already earns 80% of its revenues from Compaq.

    Currently at a price of Rs 475 Mphasis trades at a P/E multiple of 57.8 its annualised 1HFY01 earnings. This is quite high compared to the valuation of its peers. Considering the fact that Mphasis has lower operating margins the valuations seem out of place.

    One of the possible explanations for this valuation is the jump in bottomlines by 80%. Given the fact that topline has not grown, the issue is how long can the profitability sustain? The vertical is getting very crowded and competition is getting tough. This could impact the billing rates on one hand, on the other hand marketing expenditure could go up.

    Mphasis has once been hit due to low client concentration, now the worry is that with its focus on only one domain, and that too just as a service provider, history may repeat itself.

    The challenge for Mphasis is to move up the value chain or find a niche area for operation. The option Mphasis has is, either to diversify or get into the products business. But one thing is for certain, that the times ahead are tough.

    Mphasis’s 1HFY01 turnover is Rs 797 m. In light of this, the company’s turnover target of Rs 2,500 m for the whole of FY01 seems quite an uphill task. To achieve this, the management must have some miracle up its sleeve.



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