ACCUMULATE
CMP: Rs 517 Target Price: Rs 560
Mphasis beats expectations yet again with US$ 232 mn (+9.2% QoQ, highest in the sector once again).
ITO leads the way with a 13% sequential growth; Apps/BPO grow by 9%/6% QoQ.
Higher revenue/operating margins combined with lower translation losses and effective taxes drive net profit beat.
Mphasis continues to vindicate our faith in the company and continues to perform to our 'Best Demand' thesis (note Mphasis has remained our top pick in the sector for ~2 years now).
We up our FY09/FY10 EPS estimates by ~12.6%/26.5% to Rs 41.3/42.8 V/s Rs 36.7/Rs 33.8 driven by increase in revenue/margin assumptions and lower tax rates (refer table below)
Still like Mphasis as the best demand play in the sector however cut our rating to ACCUMULATE with a revised target price of Rs 560, based on 12.5x 1 year rolling forward P/E multiple as we expect the stock to take a breather (after ~ 240%+ move in the past 6 months) and hence would be aggressive buyers only at lower levels.
Mphasis beat ours as well as street's expectations with revenues at US$ 232 mn (+9.2% QoQ). Operating profits came in at Rs 2919 mn (+3.6% QoQ, +100% YoY) with operating margins at 26.4%, down 50 bps sequentially (V/s our expectation of ~120 bps decline) impacted by currency appreciation. Net profits at Rs 2292 mn (+2.1% QoQ, +128% YoY) beat estimates by a mile (our est. of Rs 1728 mn) driven by higher revenue/margin performance, lower forex losses (of Rs 15 mn V/s our est. of Rs 235 mn) and lower effective tax rate at 6%. Co reduced overall employee count by ~1,057 people (after strong hiring over the past 2 quarters).Pricing remained stable, negating some street talk of price discounts being demanded by HP during the quarter, however co did not rule out the possibility of price reductions going forward, which remains a key downside risk to our call on the stock.
ITO continues to drive growth
Mphasis reported strong revenue performance with revenues at US$ 232 mn (+9.2% QoQ) with ITO leading the growth at 13% sequential growth. Revenues from Applications and the BPO business grew by 9%/6% QoQ. Increase in onsite employee count in the applications business continues to point towards start of new engagements lending visibility to future offshore shift of business.
Reported pricing holds stable
Reported pricing was stable with onsite rates in the applications business and offshore ITO business increasing to US$ 72/hr and US$ 22/hr (V/s US$ 71/hr and US$ 21/hr sequentially). However the co mgmt indicated during the call that it did not rule out the possibilities of any price cuts going forward, something that we would agree on given the increasing dependence on HP.
Increase FY09/FY10 EPS estimates to Rs 41.3/Rs 42.8
We are increasing our FY09/FY10E earnings by ~12.6%/26.5% to Rs 41.3 and Rs 42.8 (V/s Rs 36.7 and Rs 33.8 earlier) as we build in higher revenue/margin assumptions and lower effective taxes. We increase out target price to Rs 560 (V/s Rs 310 earlier), based on 12.5x 1 yr rolling forward P/E multiple, however cut our rating to ACCUMULATE (from BUY earlier) as we expect the stock to take a breather after the tear away rally in the past 6 months. Downside risks to our call remain in the form of adverse exchange movements and any adverse price cuts from HP.--~--~---------~--~----~------------~-------~--~----~
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