Mphasis? revenue outlook has deteriorated further as all segments struggle for growth. Accelerated decline of HP channel continues, while sustained sluggish organic growth in the direct channel is a concern.
We believe the change in employment status of about 800 Digital Risk staff from permanent to temporary points to a weak outlook. We cut revenue and EPS estimates for FY2015E by 6% and 7% and target price to Rs 370 (from Rs 395 earlier). Retain ?sell?.
HP channel revenues have declined for 10 straight quarters. The management had recently indicated that volumes from this channel will decline 20-25% in the next 12 months. There are no visible signs of success in arresting this sharp decline. Organic growth in the direct channel has been disappointing with flattish revenues over the last eight quarters.
Hopes of growth were pinned on Digital Risk, which bagged two $100 million+ deals just 2-3 quarters ago and had plans to hire about 500 people to deliver these projects. Mphasis has now changed the employment status of about 800 of the 1,800 DR employees from permanent to temporary; we view this as a sign of poor revenue growth outlook. In an effort to resuscitate growth, Mphasis has undertaken a re-branding exercise. These will reflect in further increase in SG&A expenses and keep operating margins under pressure.
Kotak Institutional Equities
