Mphasis direct channel disappointed with a 5% q-o-q decline (on an organic dollar revenue basis) in Q2. This, combined with managements guidance of continued declines in the HP business in the near-term, is likely to lead to an organic revenue decline of 4% over FY12-14F.
Margins also disappointed with an 80-bps q-o-q decline and further decline seems likely in Q3FY13F on account of wage hikes. MphasiS, despite flattish earnings growth over FY12-14F, trades at ~13x FY14F EPS of R38.8, which is a ~15% premium to Wipro (10% EPS CAGR over roughly the same period). We maintain our reduce rating.
MphasiS announced two deal wins: one with TCV of $40 million, starting in Q3FY13Fand spread over five years and another with TCV of $60 million, spread over 15 months starting Q4FY13F.
While the deal wins are positive, our revenue estimates are largely unchanged as the upside from the deals will be offset by the lower revenue run-rate in the direct channel business on account of MphasiS exiting the India government business.
Our target price, based on 9x (unchanged) one-year forward EPS of R38.5, increases to R350 (from R340) largely on a roll-forward basis. Our EPS estimates have changed only marginally down 3% in FY13F and up 2% for FY14F. We think the target multiple of 9x is fair in light of continued declines in the HP channel revenues and flattish earnings over FY12-14F.