Stock Review: MPHASIS

Stock Review: MPHASIS


With flat revenue and declining profits, MphasiS continued to post subdued numbers for the third quarter in a row. Pricing pressure from the company's parent and largest client, Hewlett Packard (HP), and lower volume growth in comparison with the other industry peers are major concerns for the country's seventh largest software solutions provider.

HP's new strategy of increased focus on IT services and enterprise solutions and exit from its PC business could prove to be positive for MphasiS in the future.
For the July 2011 quarter, the Bangalore-based player posted a 2.9% sequential growth in its topline at . 1,293 crore. This was on the back of a 3% volume growth, of which only 1.3% is from the direct operations while the remaining accrued from several one-off items booked in the revenue. Business from HP, which contributed over 65% of the overall revenues, showed a 5% drop in net sales against the previous quarter.

MphasiS reported an operating profit margin of 22.9% during the quarter – the lowest in the past 12 quarters. The company has been facing margin pressure on account of price cuts on the technology services it provides to HP. Besides, employee expenses in relation to net sales have increased substantially over the past several quarters. This further led to a 10% drop in the company's profit to . 195 crore.

MphasiS plans to take strong cost-control measures such as limiting pricing pressure from HP and other direct channels customers so as to offset margin pressure. Also, it is trying to increase its non-HP revenue. The company added 18 new direct channel clients during the quarter with 13 from the emerging industries segment.

With a cash balance of . 286 crore on its balance sheet, the company is considering inorganic growth options. MphasiS expects to consolidate Wyde Corporation, acquired earlier this year, from September onwards, which will add to the company's topline in the coming quarters. At the current market price of . 354.7, the stock trades at eight times its earnings for the trailing 12 months, which is on a lower side of the P/E range of 10-15 for other industry players of similar size.

Concerns on growth in the HP business and an uncertain macro environment, particularly in the banking and insurance segment, continue to loom over the company's future performance. Various leading brokerage houses have downgraded their rating on the stock, indicating a long-term downtrend. In this scenario, what offers some solace to the investors is the company's renewed focus towards direct business, increased diversification and strong cash position.