>MPHASIS LIMITED (MERRILL LYNCH)

■ Mgt meeting induces confidence
We hosted MphasiS management at our DSP ML Corporate day at Mumbai. Management vision of achieving US$2bn revenues over next 2-3 years including inorganic initiatives and confidence in maintaining ~22% EBIT margins during FY10 which is inline with BAS-MLe reinforces our long term bullish stance on the stock. We also raise earnings estimate by 3% for FY10e and FY11e to factor AIG captive unit acquisition and raise PO to Rs750 at PEG of 1x in line with 2 yr EPS CAGR of 15% vs. 14% earlier. Our revised PO implies target P/E of 15x FY10E (Oct. yr end).

■ Expect margins to sustain at current levels
Expect EBIT margins to maintain at current levels of ~22% for FY10, in line with BAS-MLe. Increase in seat utilization, consolidation of facilities and increasing share of high margin ITO business to help sustain margins. Besides we see minimal risk to margins from rupee appreciation as ~70% of its 12 months US$ revs are hedged at favorable USD/INR rate of Rs47-48.

■ Pricing cuts with HP factored in 3Q results
While MphasiS continues to see pricing pressure in sectors such as telecom & manufacturing, pricing pressure in Banking, finl services & insurance (~40% revs) has subsided as per management. Even with HP, management indicated that pricing is market driven and its recent master service agreement with HP factors low single digit pricing cuts, in line with market. We believe 3Q results factors recent pricing agreements and margins unlikely to surprise on the downside

■ Share of ITO to increase
Expect revenues to cross US$1bn by FY10E (BAS-MLe at US$1.05bn) and highlighted vision of reaching US$2bn revenues over next 2-3 year; including inorganic initiatives. Share of ITO revs to grow from 19% (FY09) to ~ 30% (FY12e).

To see full report: MPHASIS LTD