Saturday, July 14, 2012

>MPHASIS: Mulling share buyback as cash reserves pile up

 The company expects volumes in Direct channel to rebound in 3QFY12, with 3-4% QoQ growth. HP shall continue to be a drag with sequential volume decline of 4-5%. Despite average wage hikes of 8% at offshore and 3% at onsite, and a mere ~5-10bp OPM sensitivity to per percentage change in currency, the company expects EBITDA margins to expand by 30-40bp QoQ in 3QFY12, led by: [1] Facilities consolidation, as the company gave up as many as 3,000 seats after continued headcount decrease, and [2] ~50bp tailwind from currency.


 EBIT margins in HP's services business have fallen sharply, and the parent company is focused on profitability. This is driving HP's decision to shift some work to their wholly owned subsidiary HP India at Mphasis' expense. Volumes from HP channel will be flat to marginally lower in FY13 too, while volumes in direct channel are expected to grow by 10%. The company expects FY13 EPS to be ~INR41-42, on the back of favorable hedges (@~INR52/USD v/s ~INR50 for FY12).


 Mphasis continues to generate operating cash flow of ~USD15m per month, and with no big-ticket acquisitions on the anvil, the management is mulling over the possibility of a share buyback.


 We have revised our FY12/13 revenue estimates downwards by 1.4/2.1% and increased FY13 EPS estimate by 4.4%. While buyback expectations may support the stock, structural growth problems on high HP dependency need to ease off before we turn incrementally positive on Mphasis. The stock trades at 10x FY13E earnings. Maintain Sell.


To read report in detail: MPHASIS
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