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MphasiS pricing worries reinforced

MphasiS pricing worries reinforced
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First Published: Thu, Feb 25 2010. 11 44 PM IST

Updated: Thu, Feb 25 2010. 11 44 PM IST
The shares of MphasiS Ltd had outperformed its peers by a huge margin in 2009. But the stock has lost some of its sheen since it hit a high of Rs780 in mid-November. Between then and Wednesday, just prior to the company’s quarterly results announcement, the stock had lost 5.7%, compared with a rise of 5.6% in the National Stock Exchange’s CNX IT index.
One of the reasons for the underperformance, of course, was that valuations had become rich. Besides, there was an uncertainty regarding price cuts the company would have to offer its parent company Hewlett-Packard Co. (HP). HP now accounts for at least 70% of the company’s total revenue. Analysts were expecting a cut in billing rates. Motilal Oswal Securities Ltd, for instance, had factored in a fall of 4% in average billing rates this fiscal year ended October.
Graphic: Yogesh Kumar/Mint
As it turns out, the company has reported a sharp 18% sequential drop in billing rates for its infrastructure services business and 12.5% drop in its business process outsourcing business. These two segments account for 32% revenue and 27% of profit. The application services division, which accounts for the remaining, reported an improvement in realizations. Therefore, the drop in average billing rates at the company level is not very high.
According to an analyst, investors are worried about a cut in prices in the application services segment as well later this year. If this happens, the fall in average billing rates would be higher than expected. While there has been an uncertainty about pricing cuts in the past few months, the sharp drop in billing rates of the infrastructure services and business process outsourcing divisions has caused investors to get more nervous. MphasiS shares ended 8% lower on Thursday as a result.
The results were more or less in line with expectations, with revenues growing by 3.1% and operating profit rising by a healthy 8.2%. For now, neither the quarterly results nor the effect on pricing last quarter are likely to change analysts’ earnings estimates materially. Volume growth prospects remain strong, thanks to work being handed down by the parent company. In fact, volume growth was strong across all segments last quarter. In the 12 months to October 2008, services rendered to the parent company accounted for 56% of revenues. This increased to 69% in the year to October 2009 and 71% in the last quarter. While work to HP has been growing at a fast pace, the potential is huge, considering that HP’s total services revenue is more than 50 times the size of the company.
Write to us at marktomarket@livemint.com
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First Published: Thu, Feb 25 2010. 11 44 PM IST