MphasiS may exit non-strategic businesses

Company booked Rs 64 crore loss in Q1 on exiting India govt business

After initiating the process to exit its low-margin India government infrastructure business earlier this year, mid-size IT services company MphasiS is looking at discontinuing a few more non-strategic businesses in the coming quarters, sources said.After initiating the process to exit its low-margin India government infrastructure business earlier this year, mid-size IT services company MphasiS is looking at discontinuing a few more non-strategic businesses in the coming quarters, sources said.

In the November-January quarter of FY14 (for MphasiS, it is the first quarter), MphasiS had said it had entered into a definitive agreement for sale of Indian government infrastructure business on a slump sale basis as the business was “a drag on its revenues and profits for quarters”. As a result of this, the company had booked an exceptional loss of Rs 64.4 crore.

“Our focus is on having a portfolio aligned with our future direction,” MphasiS’ Chief Executive Ganesh Ayyar told Business Standard. “We will be doing some rationalisation in our business to truly become the next-generation technology player.”
 

CONSOLIDATING

• As on January 31, MphasiS held $341 million (Rs 2,049 crore) in cash
• Analysts say the company is on the lookout for acquisitions of companies with revenues of around $100 million (Rs 601 crore)
• None of the businesses it plans to exit are “large enough to make a huge dent”, says CEO Ganesh Ayyar

While Ayyar refused to share the details of the businesses the company plans to exit, he added that none of those is “large enough to make a huge dent”.

Ayyar had earlier said that the exceptional loss due to the decision to sell contracts in the India government business space would be a one-off affair. However, according to analysts, the company might book such costs in the coming quarters as well.

“MphasiS is looking to sell off an unprofitable business acquired in the past, and if the sale goes through, there could be an impairment charge of $7-$9 million (Rs 42-54 crore) either in February-March 2014 (second quarter of FY14) or in April-June 2014 (first quarter of FY15),” brokerage firm Nomura said in a report published recently. “However, there will be no revenue impact from this sale.”

Religare Institutional Research also said it expects potential exceptional loss of $7-$9 million in the current quarter due to the sale of the loss-making business by the company.

Additionally, based on interactions with MphasiS’ management, some analysts said the company is on the lookout for acquisitions of companies with revenues of around $100 million (Rs 601 crore). As on January 31, MphasiS held $341 million (around Rs 2,049 crore) in cash.

“After the successful integration of Digital Risk, MphasiS is all set to acquire a company in the $100 million-$150 million revenue size with specialised vertical expertise and with a similar OPM (operating profit margin) profile,” brokerage firm Dolat Capital said in a report.

In 2012, MphasiS had announced that it plans to buy Digital Risk in an all-cash deal for $175 million with an additional earn-out component. The company had completed the acquisition by February 2013. Florida-based Digital Risk is one of the largest independent providers of solutions related to risk, compliance and transaction management to the US mortgage market.

Nomura also said that MpahsiS' management has indicated to them that they are focused on inorganic growth and would look to acquire companies with niche capabilities around mobility or analytics, and those that are focused on expansion of client landscape in its chosen verticals.

"We are not averse to an acquisition, but it should fit our requirements. We would not go by the value of the acquisition, but by the value that the company can bring to us," Ayyar told Business Standard.