Mphasis Ltd. BUY
Results tepid, Investments to fuel growth continue
Price Rs232 Target Price Rs 357
Sensex 17,759
Mphasis’s Q3FY08 results were tepid with both the headline and bottomline numbers coming in below estimates. Revenues came in at Rs 6323 mn, up 5.1% QoQ. Operating margins declined by 40 bps sequentially to 17.5%, while net profits at Rs 663 mn were flat QoQ. We would like to note that despite the lack of positive catalysts in numbers, the employee addition remained on track ( net addition during the quarter was 2,158) with an increase in offshore IT services and ITO pricing. Besides the revenue growth in ITO and BPO was in line, with applications growth tad lower on account of end of certain projects. The management continued to emphasize that investments to fuel future growth would continue and stuck with the indication of 8k-10k net additions for CY08 which support the local EDS’s comments that off shoring momentum would pick up from Q1CY08.
We have revised our estimates (FY09E and FY10E EPS cut by ~9%) with the
factors being (1) higher than expected employee addition during the quarter, (2) increase in pricing and build in higher investments going forward. We expect Mphasis to report revenue, EBITDA and PAT CAGR of 36%, 38.8% and 42.5% over FY07-10E. We would note that the stock has corrected by ~ 20%+ in the recent past and believe that the current market price factors in the soft quarterly performance already and hence would recommend a ‘BUY’ on the stock with a revised1 year forward target price to Rs 357 (from Rs 384 earlier) based on 15x 1 year forward rolling earnings multiple.
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