New Document top_band
 
Business Standard

Mphasis: Muted outlook leads to sharp earnings cuts

Mgt sees parent HP's revenues (55% of its total sales) to be under pressure as HP Enterprise Services has lost four key accounts

Read more on:    Mphasis | It Industry
Related News

In a recent visit with analysts, midcap IT company indicated that its troubles are far from over and that its Q4FY12 results (company follows October year end) are likely to be subdued. The management expects its parent HP's revenues (55 per cent of its total sales) to be under higher pressure as HP Enterprise Services (HPES) has lost four of its key accounts.

The company expects 5-6% further sequential fall in its HP volumes along with zero growth in its direct channel revenues for the October 2012 quarter. Analysts expect the direct channel business to grow by 15-20% in FY13, partly offsetting a 15% fall in HP revenues.

This means Mphasis will now have to accelerate its efforts to boost revenues via its direct channel. This could entail higher investments ( $20-$30 million in FY13),which in turn will impact its near-term profitability. Though, this growth will restrict employee reduction, its EBITDA margin is likely to be down 280 basis points in FY13 to 16.7%. Notably, the company has been building up its direct channel deal pipeline, but due to slower deal closures, they are likely to contribute meaningfully only in FY13, believe analysts.

"Mphasis has been able to renegotiate its contract with HP at similar pricing terms as before. However, we see revenue from the HP channel falling in FY13 in line with or greater than the 11-13% that HP has guided for its HPES division. Mphasis expects to significantly increase its direct channel investments including expanding its solutions offering, sales and marketing, building large deal teams, and possible acquisitions. These efforts could take about six months to bear fruit, however, even as a mixed demand environment could test the strategy. Given the strong cash balance, we believe management could look to hike its dividend payout. We forecast FY12-13 payout ratios of 46-48% versus 17% in FY11", believes Abhiram Eleswarapu, IT analyst at BNP Paribas.

Most analysts have trimmed their revenue and earnings estimates for Mphasis by 2-5% and 9-10% respectively for FY13-14. The only silver lining appears to be its healthy cash kitty (estimated at $0.5 billion in FY12) which could be deployed towards higher dividend and/or buying out another company. "Mphasis trades at a price/earnings multiple of 12 times FY13 earnings.

"We are raising our target P/E multiple to 10 times (earlier 9 times) to account for the company's higher dividend payout and huge cash balance. We are lowering our FY13 earnings estimate by 20.6% due to a sharper decline in volume of HP channel and expected margin erosion in FY13. We are lowering our target price to Rs 360 (from Rs 375) based on 10 times average FY13-14 earnings and maintain reduce reco on the stock", believe Sushil Sharma and Manav Patel of Brics Securities. A stronger rupee versus the dollar is likely to add to Mphasis' woes in the near term.

Read more on:   
|

Read More

Air India resumes flights to the US

Air India has resumed  flights to the US. Flight AI 101 from Delhi to New York and AI 191 form Mumbai to Newark will operate on schedule early ...

Quick Links

Advertisement

Back to Top