Mphasis Limited
'Rock on' Performance speaks for itself
BUY
CMP: Rs168 Target Price: Rs240
Quick Take: Another 'Rock on ' performance
Mphasis reported superlative Q1FY09 results with revenues at Rs 9777 mn (+9.3% QoQ, + 58.1% YoY) and operating profits (EBIT) at Rs 2106 mn (+24.4% QoQ, +246.6% YoY). Operating margins remained steady at Oct month levels at ~26.5%.Net profits at Rs 2100 mn (+14.7% QoQ, +271.1% YoY) beat estimates boosted further by lower tax rates. Net employee addition remained in line at ~1,193 (with apps HC up by ~638 employees sequentially). Our confidence on Mphasis as the best demand story in the mid cap IT services space continues to get reinforced with enviable performance over the past 3 quarters now. Our view gets vindicated with Mphasis being the 2nd best out performer in the IT services universe over the last 12 months (Mphasis has outperformed broader markets by ~45%, next only to Infy on a LTM basis, refer section below). Although we increase our FY09 earnings estimates by ~25% currently, we will review them shortly post discussions with co management as we believe there is significant upgrade to current estimates. Maintain BUY with a price target of Rs 240.
ITO, Applications continue in top gear mode
Applications business and ITO business continued to drive the growth for Mphasis with revenues in Apps business at Rs 6338 mn (+11.4% QoQ, +59.35 YoY) while ITO contribution stood at Rs 1668 mn (+20% QoQ, +112.8% YoY). Mphasis added ~1193 employees during the quarter with the Apps HC increasing by ~638 QoQ while ITO employee strength increased by ~571 during the quarter. We find the trends in Apps business encouraging as Mphasis showed ramp up in offshore count during the quarter which indicates that offshore transition on significant number of onsite engagements will pick up (note that over the past few quarters Mphasis had been reporting increase in onsite employee count in Apps business with co mgmt indicating that it would transition work offshore going forward)
Operating margins at 26.5%
Mphasis's offshore proportion of revenues is amongst the highest in the industry given the segmental distribution of business (offshore revenues accounted for ~72% of co wide revenues during Q Jan'09) which has helped push Mphasis's operating margins at 26.5% during the quarter helped by ~25%+ currency depreciation and improvement in utilization levels during the last 12 months. We note that Mphasis's operating margins are now higher than most other Tier 1 names apart from Infy and TCS.
Further we highlight that we have not built in similar margins going forward with our FY09E and FY10E operating margins at 22.6% and 21.8% respectively.
Increase FY09E /FY10E earnings by ~25%/7%
Driven by significant beat in Q1FY09 results we are increasing our FY09E and FY10E earnings by ~25% and ~7% respectively to Rs 29.9 and Rs 28 respectively( V/s Rs 24 and Rs 26.2 earlier). Mphasis is currently trading at ~5.7x on FY09E earnings and on 3.6x FY09 EV/EBITDA. We note that although we build in moderation in growth rates for Mphasis as well (like other sector peers) Mphasis, in our view offers the best demand visibility in the sector both on account of EDS's internal work as well as the HP-EDS parentage helping it at external clients. We believe that there is scope for us to increase our FY09 estimates further and would review them shortly post discussions with company shortly.
Our positive view on the stock continues to get reinforced with superlative performance over the past 3 quarters as well as Mphasis's out performance over the last 12 months stands next only to Infosys. (refer section below). We maintain BUY with a price target of Rs 240. Key risks to our call emanate from significant INR appreciation and any unfavorable decision by the parent HP-EDS which could be detrimental to minority shareholders.
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