Saturday, November 28, 2009


Quick Comment: We believe the one-time shift in revenue and EPS for Mphasis is behind us. Growth rates have been eroding from high 15% QoQ in Oct. ‘08 to a mere 2% QoQ in Oct. ’09, and the stock has reverted to growing in line with sector peers. We believe that at current levels the stock’s risk/reward looks unfavorable and would recommend that investors switch from Mphasis to HCLTech (Rs339, OW) or MindTree (Rs643, OW).

Oct. ‘09 Results: Reported revenue of Rs11.3bn (+2.4% QoQ, +26.5% YoY) was in line with our estimate. EBIT margins were flat at 21.9%. Excluding Fx gains, revenue grew 1.6% QoQ and EBIT margins declined to 21.1% (-53bps QoQ, +220bps YoY), remaining below our estimates. Net income of Rs2.45bn (+6.9% QoQ, +33.9% YoY) was higher than our and the Street’s
expectations due to higher Fx gains.

Oct. ‘09 Results: Revenue Growth Continues To Decelerate; UW

Key Results Positives: 1) BPO revenue grew above the company average at 3.7% QoQ, with strong improvement in margins to 23.9% (+282bps QoQ, -638bps YoY); 2) Telecom and BFSI grew strongly at 11.7% QoQ and 5% QoQ, respectively; 3) Fixed price
revenue improved to 12% of revenue (+300bps QoQ).

Key Results Negatives: 1) ITO revenue was flat at 2.1bn (19% of revenue) and gross margins in ITO declined to 38.4% (-568bps QoQ, +692bps YoY) after seven consecutive quarters of improvement; 2) Top client, top 5 and top 10 clients declined -12.2% QoQ, -9.6% QoQ, -4% QoQ, respectively; 3) Billing rates in BPO declined for the second consecutive quarter

Valuations: The stock trades at ~16x F2010e EPS, a 20–25% discount to larger vendors, and it remains the most expensive mid-cap stock in our coverage universe.

To read the full report: MPHASIS LIMITED