We maintain our ‘neutral’ rating on MphasiS India shares, but lower the target price to Rs 415 (Rs 460 earlier) due to the cut in FY14-15f EPS estimates. We cut our EPS estimates by 10% to 17% largely on back of a cut in our revenue estimates for FY14-15f as we anticipate higher declines in the HP channel and weak performance in the direct channel.
Our target is based on 10x FY15f EPS of R41.4. The 10x multiple we assign is in line with its five-year historical average and at these levels, we see limited upside potential for the stock. We prefer Tech Mahindra Ltdand Hexaware Technologies Ltd to MphasiS, within Tier-2 IT on better growth prospects.
We cut our dollar revenue growth estimates by 5% to 8% for FY14-15f on higher drag in HP and muted performance of the Direct channel. We lower our margin estimates by 140 bps for FY14f largely on account of a change in our USD-INR assumption to 62 versus 66 earlier. We estimate dollar revenue CAGR of 4% and EPS CAGR of 8% over FY13-15f.
We expect a 20% y-o-y decline in the HP channel (40% of revenue) in FY14f on the back of similar or higher declines over the past two years, which have continued in Q4FY13 as well.