Mphasis: The consolidated numbers

Mphasis’s 2QFY02 performance was superior to many of its peers based on the numbers of the Indian entity. Though topline growth was moderate, the company managed to improve its operating margins significantly. However, a look at the group’s consolidated numbers reveals a very different picture.

According to the numbers based on Indian GAAP, the operating margins for the company declined quite sharply in 2QFY02. This was due to the fact that growth in cost of revenues and the SGA expenses outpaced revenue growth. A sum of Rs 14 m that was provided for e-structuring of skills was written back and was offset against the expenditure for the 2QFY02. If this write back were eliminated the operating margins for the company would have been 8.9% in 2QFY02 compared to 13.2% in 1QFY02.

The company posted 65% sequential growth in the bottomline. This was including a one time write off of Rs 24 m towards restructuring costs relating to its European business including the closure of the healthcare product line. However, during 2QFY02 Mphasis has not provided for depreciation. Also, the other income figure has jumped by 140%. If the depreciation and other income figures were same as in 1QFY02 and the restructuring cost was eliminated, the company’s net figure would have shown a dip. The deprecation figure may be included in the SGA expenses but this has not been mentioned separately.

(Rs m)	1QFY02	2QFY02	Change
Sales	723	763	5.5%
Other Income	12	29	140.1%
Expenditure	628	684	8.9%
Operating Profit (EBDIT)	96	79	-17.2%
Operating Profit Margin (%)	13.2%	10.4%
Interest	3	(7)	-313.0%
Depreciation	48	-	-100.0%
Profit before Tax	56	115	104.2%
Extra-ordinary item	-	(24)
Tax	2	0	-74.7%
Profit after Tax/(Loss)	54	90	65.4%
Net profit margin (%)	7.5%	11.8%
Diluted number of shares	15.8	15.8
Diluted Earnings per share*	13.8	22.8
P/E	19.6	11.9
*(annualised)

The only positive aspect of the company’s performance was a strong topline growth, which was 5.5% sequentially. The company’s topline growth was powered by the growth of MsourceE, the Group call center subsidiary. MsourceE posted a strong sequential growth of 36% to clock revenues of Rs 54 m in 2QFY02. Excluding the revenues from MsourceE the revenues would have grown by 3.7% on a sequential basis.

On a YoY basis, the company’s revenues grew by 12.5% and the net profit jumped by 512%. The company managed to post an operational profit of Rs 79 m as compared to a loss of Rs 31 m in 2QFY01. While the company’s revenues have grown very sharply, it has managed to control its expenditure. Infact on a YoY basis the company’s expenditure declined by 3.5%. The Indian entity contributes 56% to the group’s revenues. While the operating profit for the Indian entity was Rs 125 m in 2QFY02, the figure was Rs 79 m for the consolidated entity. This could point to the fact that other divisions of the company are not making operational profits.

At the current market price the stock is trading at a P/E multiple of 12 times in 2QFY02 annualised earnings. While the company has managed to clock a very strong performance in terms of topline, Mphasis has to clearly look at its internal processes, considering the fact company’s expenses have taken a toll on its operating margins.