MphasiS Limited (MphasiS) reported a stable operating performance despite the deteriorating business conditions.
On a sequential basis, the Company’s top line grew robustly by 9.3% to Rs9.8 billion, owing to a sharp depreciation of the rupee against the dollar, and a marginal improvement in the onsite billing rates. However, declining volume growth remains a key concern.
Currently, HP-EDS contribute 45% (~$90 million in Q1’09) to overall revenues, up from 40% in quarter-ended October 2008, which is only 1% of HP’s total services revenue ($8.75 billion in Q1’09).
In our view, HP may increase outsourcing of their work to MphasiS to cut costs, which may help support the falling sales volume.
Besides, HP’s strong brand equity and global presence will improve MphasiS’s bargaining power for renegotiating existing contracts and wining new deals.
We believe that the EBITDA margin might remain under pressure and decline from ~17% (in March 2008) to ~13.5% in 2010, owing to an increasing pricing pressure and falling utilization levels.
However, cost containment, expected cut in the variable pay/bonuses, efforts to convert fixed cost into variable costs, and improved offshore contribution might help improve the EBITDA margin beyond 2010.
At Rs182.95, the stock trades at a forward P/E of 8.8x for 2009E. In our view, the Company stands to gain from its strong brand equity and the global presence of HP, which could provide an upside to our forecasts and the target price (TP).
We have valued the stock at Rs196, using DCF valuation assuming a 13.8% WACC and a 5% terminal growth rate. This provides an upside of 7.3% from the current levels; thus, we maintain our HOLD rating on the stock.