Mphasis: Pricing blues

The stock of Mphasis, a major outperformer in the last one year, fell over 8 per cent on Thursday, even after the company announced better-than-expected results for the quarter ended January 2010 on Wednesday. The decline can be attributed to fears that a big client, HP/EDS, is tightening purse strings.

Also, while consolidated revenues rose 5.2 per cent sequentially to Rs 1,191.6 crore, it was largely aided by hedging gains (Rs 36 crore compared to Rs 10.7 crore during the same time last year). Had it not been for these gains, the revenue growth would have been in line with most estimates (around 3 per cent). The banking, financial services and insurance segment maintained momentum, while logistics, transportation and healthcare boosted revenue growth. Technology, however, still continues to be a laggard.

On a closer look, only application services grew at a fast pace, which offset the fall in revenues from information technology off-shoring (ITO) and business process outsourcing (BPO) arms. Application services grew 11.9 per cent, while BPO and ITO declined sequentially by 5.1 per cent and 7.9 per cent, respectively. The decline in BPO revenues was chiefly due to pricing pressures from HP, which accounts for a third of the business. Also, margins of BPO and ITO businesses fell over 500 basis points each due to price cuts. Overall, cushion from the application segment and lower selling, general and administration expenses helped improve operating profit margins by 40 basis points to 26.4 per cent.

At Rs 673, the stock is trading at 14 times estimated 2011-12 earnings and is expected to underperform until there is further clarity on issues such as pricing outlook from HP/EDS.

With inputs: Sunaina Vasudev & Sarath Chelluri