MphasiS’s 3QFY09 results came better than we estimated. We thus raise FY09/FY10/FY11 estimates.
We believe that this was driven largely by HP-EDS’ intent to move work offshore combined with the increasing offshore plans of its customers. We see this continuing.
Revenue in rupee terms grew 5.4% q-o-q. Application Services, BPO and ITO services revenue grew q-o-q 5.2%, 2.6% and 8.9%, respectively.
EBIDTA margin was down 47bps q-o-q following higher sequential wage cost, rent, consumables and overheads. Net profit came higher on account of higher sequential revenue, lower depreciation and tax expense.
MphasiS’ “related-party” transaction revenue grew to 70.9% of revenue in 3QFY09 – from 54.4% in the Jun ’08 quarter.
This has fuelled a sharp ramp-up in the ITO business (up 28% in the past two quarters), which reinforces our positive view on business from HP-EDS.
We have raised FY09, FY10 and FY11 EPS by 7.4%, 4.8% and 5.3%, respectively and maintain our target multiple of 15x average FY10e and FY11e earnings of Rs52.3, thus raising our target price to Rs780.
We maintain our BUY rating. In the past, the stock has traded at a 35% discount to Infosys.