MphasiS' 2QFY11 revenue was up 3.9% qoq to US$282m; its margin slipped 40bps qoq (excluding reversals in provisioning and one-off expenses). We lower our target price to `445 from `465. We maintain our Sell rating on the stock.
n 2QFY11 results - Margin disappoints. Business from the Hewlett Packard (HP) channel fell 200bps qoq to 67% (0.4% lower in absolute terms). Certain provisioning reversals in 2Q have artificially held margins at 19.1% (ex provisioning reversal, margins are at 17%). DSO decreased to 89 days (down 5 days qoq).
n Key points. Banking & capital markets (up 7.5% qoq) and insurance (up 6.9%) were the main growth drivers, while IT, communications & entertainment was down 3.7% qoq. MphasiS added 680 employees (raising total to 41,739). MphasiS has net cash of `87/share.
n Introduce FY13 estimates. We expect volume growth of 15%, flat pricing, 11% increase in number of employees and 30bps increase in margin on account of benefits owing to scaling-up.
n Change in estimates. We lower our FY11e/FY12e EPS for MphasiS by 2.6%/4.1% to `38.3/`40.6 on the lower revenue-growth trajectory and margin forecast. We cut our target price to `445, implying 12x Apr '12 EPS (maintained). Maintain Sell. Risks: more-than-expected business from HP and potential delisting.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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