Mphasis Jan'12 Result Update by icestar

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									                                                                                                                                          Mphasis Ltd




                                                                                                                                                                                 Result Update
                                                                                                           HP pressures continue, retain REDUCE

March 2, 2012
                                                                                 ¾ Jan’12 op performance met exp in INR terms (however aided
Reco                                         Previous Reco
                                                                                    by lower hedging losses). Rev (ex hedges) declined by ~2%
Reduce                                                         Reduce
                                                                                    QoQ impacted by ~7%seq decline in HP business
CMP                                               Target Price
                                                                                 ¾ HP (Non ES) declined by 15% QoQ to US$ 10.4 mn. Mgmt
Rs 432                                                             Rs 340
                                                                                    scales down revenue outlook from the segment to US$ 75-80
EPS change FY13E/14E (%)                                            (3)/n.a
                                                                                    mn (V/s US$ 100 mn earlier) , still a daunting ask in our view
Target Price change (%)                                                n.a
Nifty                                                                5,340       ¾ Challenges within HP expected to continue per mgmt while
Sensex                                                              17,584          Direct business (+6.3% QoQ) to grow decently. DSO flat QoQ
                                                                                    at 88 days
Price Performance
(%)                                 1M       3M           6M         12M         ¾ Modest cuts to FYOct’12E EPS to Rs 35.6 as FYOct’13E
Absolute                            14       33            22         (5)           unchanged at Rs 37.6. Inline/weak results belie’ turnaround
Rel. to Nifty                       11       20            14         (2)           in business’ thesis. REDUCE, TP Rs 340
Source: Bloomberg
                                                                                 In line results, profits miss on account of lower forex gains
Relative Price Chart
500   Rs                                                               % 10      Mphasis’s reported INR op performance was in line with estimates with revenues at
                                                                                 Rs 13.7 bn (+4.1% QoQ) albeit aided by lower than expected hedging losses at
450                                                                        0
                                                                                 ~Rs 260 mn (Emkay est ~Rs 480 mn) with revenues(ex hedging) declining by ~2%
400                                                                        -10
                                                                                 QoQ. Revenues from HP channel continued to decline sharply (-7.3% QoQ) while
350                                                                        -20   Direct business continue to grow decently by ~6.3% sequentially (albeit aided by one
300                                                                        -30
                                                                                 time license revenues of US$ 3.2 mn). While HP Enterprise Svcs declined as
                                                                                 expected, revenues from HP (Non ES) also declined by ~15% QoQ to US$ 10.5
250                                                                        -40
  Mar-11   May-11      Jul-11       Aug-11   Oct-11       Dec-11      Feb-12     mn. EBITDA margins improved by ~50 bps QoQ to 18.4% (V/s est of 18%) aided by
                    Mphasis (LHS)             Rel to Nifty (RHS)
                                                                                 weak currency and headcount reduction (note that Mphasis has been reducing overall
Source: Bloomberg                                                                             rd
                                                                                 HC for the 3 quarter in a row while increasing utilization during the period). Profits at
                                                                                 Rs 1.85 n (+0.7% QoQ,-18.5% YoY) missed expectations (~Rs 2 bn) despite in line op
Stock Details
                                                                                 performance impacted adversely by lower translation gains. DSO remained flat
Sector                                                   IT Services
                                                                                 sequentially at 88 days with the Direct proportion of business increasing to 40% of
Bloomberg                                                 MPHL@IN
                                                                                 revenues V/s 38% in Oct’11 qtr.
Equity Capital (Rs mn)                                               2101
Face Value(Rs)                                                           10
                                                                                 Pressures at HP remain, HP (Non ES) revenue outlook scaled down
No of shares o/s (mn)                                                  210
                                                                                 While Mphasis’s business from HP Enterprise Svcs segment continues to
52 Week H/L                                                        488/277
                                                                                 remain under pressure for past several qtrs, management’s aggressive revenue
Market Cap (Rs bn/USD mn)                                      91/1,850
                                                                                 ramp up outlook from other segments within HP has been scaled down to
Daily Avg Volume (No of sh)                                        386260
                                                                                 < US$80 mn (V/s US$ 100 mn earlier) which still remains a daunting ask per us.
Daily Avg Turnover (US$mn)                                              2.9      Management continues to expect further pressures on the Enterprise Svcs side,
                                                                                 however expects pickup in the non ES side in the subsequent qtrs which should
Shareholding Pattern (%)
                                                                                 aid meet the revised outlook.
                          Dec-11             Sep-11                Jun-11
Promoters                       60.5             60.5                 60.5       Modest cuts to FYOct’12E earnings, maintain REDUCE, TP Rs 340
FII/NRI                         20.3             20.3                 20.4
                                                                                 Further up move on Mphasis post a 35%+ movement in the past 3 months helped by
Institutions                        6.7          11.4                   6.3
                                                                                 inexpensive valuations (read: 25% + of the market cap in cash. <9x 1 yr fwd P/E) in
Private Corp                        7.4               2.6               7.7      our view required stability/improvement in business prospects at the HP level which
Public                              5.1               5.2               5.2      remains elusive in the Jan’12 results report. Jan’12 results report belie both
Source: Capitaline                                                               ‘turnaround in business’ thesis as well as disappoint expectations on a likely
                                                                                 share buy back announcement. Retain REDUCE, TP Rs 340

                                                                                 Y/E, Oct       Net        EBITDA         PAT      EPS    ROE      P/E       EV/      P/B
                                                                                 (in Rs mn)    Sales     Core       %              (Rs)     %       (x)    EBITDA      (x)
                                                                                 FY10         50,366    12,649   25.1   10,908     51.9   38.6      8.3      5.9      2.7
                                                                                 FY11         50,980     9,846   19.3    8,216     39.0   22.0     11.1      7.4      2.3
Manik Taneja
                                                                                 FY12E        55,275    10,372   18.8    7,514     35.6   19.0     12.1      6.6      2.0
manik.taneja@emkayglobal.com
                                                                                 FY13E        58,741    10,776   18.3    7,935     37.6   17.3     11.4      5.8      1.8
+91 22 6612 1253


Emkay Global Financial Services Ltd                                                                                                                                          1
                                                       Mphasis Limited                                                                                                                                           Result Update


  Rs mn                            Q Oct'10 Q Jan'11 Q April'11 Q July'11 Q Oct'11 Q Jan'12 YoY (%) QoQ (%) FYTDOct'12                                                                                     FYTDOct'11 YoY (%)
  Revenue                           13,454    12,335     12,571                12,936              13,138           13,672                    10.8                 4.1                    13,672                      12,335                   10.8
  Operating Expenditure             10,250     9,761     10,165                10,421              10,787           11,151                    14.2                 3.4                    11,151                             9,761             14.2
  Cost of revenues                    9,051    8,769       9,186                9,397                   9,626           9,996                 14.0                 3.8                     9,996                             8,769             14.0
  as % of sales                        67.3     71.1         73.1                72.6                    73.3                 73.1                                                          73.1                              71.1
  SG&A expenses                       1,199     992          979                1,024                   1,161           1,155                 16.4               (0.5)                     1,155                              992              16.4
  as % of sales                         8.9      8.0          7.8                   7.9                   8.8                  8.4                                                              8.4                            8.0
  EBITDA                              3,204    2,574       2,406                2,515                   2,351           2,521                (2.1)                 7.2                     2,521                             2,574            (2.1)
  Depreciation                         374      359          337                  440                    414                  468             30.3               (5.9)                        468                             359              30.3
  EBIT                                2,830    2,215       2,069                2,075                   1,937           2,053                (7.3)                 6.0                     2,053                             2,215            (7.3)
  Other Income                         310      347          497                  424                    479                  338            (2.7)                13.0                        338                             347             (2.7)
  PBT                                 3,140    2,562       2,566                2,499                   2,416           2,391                (6.7)               (1.0)                     2,391                             2,562            (6.7)
  Total Tax                            300      295          393                  557                    582                  544             84.4                 4.5                        544                             295              84.4
  Adjusted PAT                        2,840    2,267       2,173                1,942                   1,834           1,847              (18.5)                  0.7                     1,847                             2,267         (18.5)
  (Profit)/loss from JV's/Ass/MI         0        0             0                          0                  0                 0                                                                   0                             0
  APAT after MI                       2,840    2,267       2,173                1,942                   1,834           1,847              (18.5)                  0.7                     1,847                             2,267         (18.5)
  Extra ordinary items                   0        0             0                          0                  0                 0                                                                   0                             0
  Reported PAT                        2,840    2,267       2,173                1,942                   1,834           1,847              (18.5)                  0.7                     1,847                             2,267         (18.5)
  Reported EPS                         13.5     10.8         10.3                   9.2                   8.7                  8.8         (18.5)                  0.7                          8.8                           10.8         (18.5)


  Margins (%)                                                                                                                              (bps)                 (bps)                                                                      (bps)
  EBIDTA                               23.8     20.9         19.1                19.4                    17.9                 18.4          (243)                    54                     18.4                              20.9           (243)
  EBIT                                 21.0     18.0         16.5                16.0                    14.7                 15.0          (294)                    27                     15.0                              18.0           (294)
  EBT                                  23.3     20.8         20.4                19.3                    18.4                 17.5          (328)                 (90)                      17.5                              20.8           (328)
  PAT                                  21.1     18.4         17.3                15.0                    14.0                 13.5          (487)                 (45)                      13.5                              18.4           (487)
  Effective Tax rate                    9.6     11.5         15.3                22.3                    24.1                 22.8         1,124                 (134)                      22.8                              11.5          1,124



                                                       Sequential Revenue growth (in %)

                                                         20.0

                                                         15.0
    While Mphasis’s revenue performance
    stood out during late CY08/early CY09                10.0
    driven by rampups from HP channel,
                                                          5.0
    we see no end to recent revenue
    struggles                                             0.0
                                                                                                          Dec'08




                                                                                                                                                        Dec'09




                                                                                                                                                                                                        Dec'10
                                                                                 June'08




                                                                                                                                 June'09




                                                                                                                                                                                June'10




                                                                                                                                                                                                                                June'11
                                                                    March'08




                                                                                                                   March'09




                                                                                                                                                                   March'10




                                                                                                                                                                                                                  March'11
                                                                                               Sep'08




                                                                                                                                            Sep'09




                                                                                                                                                                                           Sep'10




                                                                                                                                                                                                                                            Sep'11


                                                         -5.0

                                                        -10.0
                                                                                                 Infosys                      TCS                    Wipro                    HCL Tech                     Mphasis*

                                                       Source: Companies, Emkay Research



                                                                                                                                                     Oct'12E                                                     Oct'13E
                                                       (in Rs mn, except EPS)                                                         Old              New                    Chg.                  Old               New                  Chg.
                                                       Reported Revenues (US$ mn)                                               1,129                  1,115              -1.2%                1,241               1,224                  -1.4%
                                                       Revenues (ex hedging, in US$ mn)                                         1,194                  1,175              -1.6%                1,241               1,224                  -1.4%
   FYOct’12E earnings lowered by 3.4%                  Revenues                                                                55,956                55,275               -1.2%             59,587               58,741                   -1.4%
   driven by lower revenue assumptions.
                                                       EBITDA                                                                  10,397                10,372               -0.2%             10,793               10,776                   -0.2%
                                                       Net Profits                                                              7,788                  7,514              -3.5%                7,942               7,935                  -0.1%
                                                       EPS                                                                           36.9               35.6              -3.4%                     37.6               37.6               0.0%
                                                       Source: Company, Emkay Research


Emkay Research           2 March 2012                                                                                                                                                                                                                2
                                                        Mphasis Limited                                                         Result Update

  Key Financials
   Income Statement                                                            Balance Sheet
   Y/E, Oct (Rs. m)               Oct'10      Oct'11     Oct'12E    Oct'13E    Y/E, Oct (Rs. m)            Oct'10   Oct'11   Oct'12E   Oct'13E
   Net Sales                      50,366      50,980      55,275     58,741    Equity share capital         2,099    2,100     2,089     2,089
   Growth (%)                        18            1           8          6    Reserves & surplus          30,892   36,897    42,652    48,731
   Total Expenditure            (37,717)     (41,134)    (44,903)   (47,964)   Minority Interest                -        -         -         -
   Growth (%)                        20            9           9          7    Networth                    32,992   38,998    44,743    50,821
   EBIDTA                         12,649       9,846      10,372     10,776    Secured Loans                    -        -         -         -
   Growth (%)                        12          (22)          5          4    Unsecured Loans               454     2,923     2,923     2,923
   EBIDTA %                         25.1        19.3        18.8       18.3    Loan Funds                    454     2,923     2,923     2,923
   Other Income                     581          665          74           -   Deferred Tax Liabilities        3       22        22        22
   Depreciation                  (1,637)      (1,550)     (1,875)    (1,985)   Total Liabilities           33,449   41,944    47,688    53,767
   EBIT                           11,011       8,295       8,497      8,791    Goodwill                         -        -         -         -
   Interest                              8       (22)        989      1,650    Gross Block                 14,145   20,037    22,037    24,037
   EBT                            12,100      10,043       9,847     10,441    Less: Depreciation           7,836    8,495    10,371    12,355
   Tax                           (1,192)      (1,827)     (2,333)    (2,506)   Net block                    6,309   11,542    11,667    11,682
   EAT                            10,908       8,216       7,514      7,935    Capital WIP                    89      102       102       102
   Growth (%)                        20          (25)         (9)         6    Investment                       -        -         -         -
   EAT (%)                          21.7        16.1        13.6       13.5    Current Assets              37,886   43,374    49,331    56,297
                                                                               Inventories                      -        -         -         -
                                                                               Sundry debtors              12,054   13,072    13,932    14,806
                                                                               Cash & bank balance          1,784    2,895     7,488    12,944
                                                                               Loans & advances             9,446    9,641    10,146    10,783
                                                                               Other current assets            2        1          -         -
                                                                               Current Liab & Prov         11,590   14,051    14,387    15,289
                                                                               Current liabilities          8,094    9,098     9,086     9,656
                                                                               Provisions                   3,497    4,952     5,300     5,633
                                                                               Net current assets          26,296   29,323    34,945    41,008
                                                                               Misc exps                        -        -         -         -
                                                                               Deferred Tax                  754      975       975       975
                                                                               Total Assets                33,448   41,944    47,688    53,767


   Cash Flow                                                                   Key Ratios
   Y/E, Oct (Rs. m)               Oct'10      Oct'11     Oct'12E    Oct'13E    Y/E, Oct                    Oct'10   Oct'11   Oct'12E   Oct'13E
   Net Profit after Tax           10,908       8,216       7,514      7,935    EPS (Rs)                      51.9     39.0      35.6      37.6
   Add : Depreciation              1,637       1,550       1,875      1,985    CEPS (Rs)                     59.7     46.3      44.5      47.1
   Add : Misc exp w/off                  -          -           -              Book Value Per Share (Rs)    157.1    185.0     212.2     241.1
   Net changes in WC             (2,443)      (2,460)      (336)      (902)    Dividend Per Share (Rs)        4.0      6.5       7.1       7.5
   Operational Cash Flows          9,170      10,814       8,360      9,313    Valuations Ratios (x)
   Capital expenditure           (1,799)      (6,796)     (2,000)    (2,000)   PER                            8.3     11.1      12.1      11.4
   Investments                   (6,988)      (3,164)           -              P/CEPS                        10.0     13.0      13.5      12.7
   Investing Cash Flows          (8,787)      (9,961)     (2,000)    (2,000)   P/BV                           2.7      2.3       2.0       1.8
   Borrowings                       421        2,469            -              EV/EBIDTA                      5.9      7.4       6.6       5.8
   dividend paid                   (858)       (980)      (1,587)    (1,758)   EV/Sales                       1.5      1.4       1.2       1.1
   Issue of shares                   13          (11)           -          -   M-Cap/sales                    1.8      1.8       1.6       1.5
   Share Premium                   (135)          12            -          -
   Financing Cash Flows            (385)         273      (1,737)    (1,892)   Profitability Ratios (%)
   changes in cash                   (2)       1,111       4,593      5,456    RoCE                          38.7     22.0      19.0      17.3
   Opening balance                 1,786       1,784       2,895      7,488    RoNW                          38.6     22.8      17.9      16.6
   Closing balance                 1,784       2,895       7,488     12,944    EBITDA Margin                 25.1     19.3      18.8      18.3
                                                                               EBIT Margins                  21.9     16.3      15.4      15.0
                                                                               Net Profit Margin             21.7     16.1      13.6      13.5




Emkay Research            2 March 2012                                                                                                           3
                                                                        Mphasis Limited                                                                                                     Result Update


                                                                       Recommendation History: Mphasis Limited - MPHL IN

                                                                         Date                 Reports                                                                  Reco                   CMP           Target

                                                                         22/02/2012           Mphasis Company Update                                                   Reduce                   411             340

                                                                         12/12/2011           Mphasis Company Update                                                   Reduce                   326             325

                                                                         01/12/2011           Mphasis_Oct'11 Result Update                                             Reduce                   325             325

                                                                         25/08/2011           Mphasis_July'11 Result Update                                            Reduce                   396             325


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                                                                         09/02/2012          Tech Mahindra Q3FY12 Result Update                                        Hold                       651           650

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Emkay Research                   2 March 2012                                                                                                                                      www.emkayglobal.com
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