MphasiS: Moving beyond HP

Margin pressures expected to intensify from ongoing pricing negotiation with HP.

MphasiS, which gets 70 per cent of its revenues from Hewlett Packard (HP), has been emphasising its efforts to diversify beyond its parent and showed reasonable success in the September quarter with eight of the 22 new clients coming in directly.

However, the sales push from the thrust on expanding revenue sources, especially in the highly competitive banking, financial services and insurance segment, apart from ongoing pricing negotiations with HP, could add pressure to the margins. The margins are already pinched by salary rises across the sector, even as attrition still continues to be at uncomfortable levels.

Net revenues grew ahead of estimates at 7.5 per cent in dollar terms over the previous quarter, while the forex impact (0.2 per cent) trimmed the rupee revenue growth at 5.2 per cent to Rs 1,318 crore. This growth included a volume growth of 4.9 per cent and a positive price impact of 0.5 per cent. A 16 per cent surge in sales, general and administrative expenses limited the Ebitda growth to 1.4 per cent quarter-on-quarter (q-o-q), while the operating margins narrowed 50 bps to 21 per cent.

The employee addition was a portent of a strong demand environment. Offshore infrastructure technology outsourcing (ITO) and application segments’ headcount increased over 9 per cent and 1.4 per cent, respectively. However, the overall employee numbers were flat q-o-q, owing to a 7 per cent cut in BPO offshore staff. Utilisation was up sequentially except for the ITO segment, where it reduced to 66 per cent from 73 per cent (q-o-q) with increased hiring.

The revenue growth outlook hinges on the outcome of pricing negotiations with HP as well as its success in acquiring new clients. Given the cash kitty of nearly Rs 1,640 crore, MphasiS is scouting for acquisitions and inorganic growth could hold the key to the success of its revenue diversification strategy. Analysts indicate the organic push will pinch margins and earnings, especially in relation to its peers. However, a depreciating rupee could counter some of the margin pressures.