We have revised our FY13 revenue estimates for Mphasis 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 dependency on Hewlett-Packard need to ease off before we turn incrementally positive on Mphasis. The stock trades at 10x FY13E earnings. We maintain sell.
Following are the key takeaways from our meeting with Mphasis management.
The company expects volumes in direct channel to rebound in Q3FY12, with 3-4% q-o-q growth. There are no signs of pressures abating within the HP channel. HP shall continue to be a drag with sequential volume decline of 4-5%.
Factoring in the rupee depreciation and about R400 million losses on hedges that are expected to be taken on the top line, the company expects INR revenue growth of 2% (3% excluding hedge losses). Excluding the hedge losses, direct channel is expected to grow revenues by 10% q-o-q in INR and HP channel by 1-2%.
Despite average wage hikes of 8% at offshore and 3% at on-site, and a mere 5-10 bp ,OPM sensitivity to per percentage change in currency, the company expects Ebitda margins to expand by 30-40 bp q-o-q in Q3FY12, led by facilities consolidation, as the company gave up as many as 3,000 seats after continued headcount decrease, and about 50 bp 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 about R41-42, on the back of favourable hedges (rupee at 52/USD versus R50 for FY12). Mphasis continues to generate operating cash flow of abut $15 million per month, and with no big-ticket acquisitions on the anvil, the management is mulling over the possibility of a share buyback.
Motilal Oswal
