MphasiS Ltd’s performance continues to be weak because of a demand slowdown from Hewlett-Packard Co. (HP), which is both its top shareholder and top client. Revenue from HP fell 3.5% sequentially in the October quarter after falling 1.1% in the quarter ended July. On a year-on-year basis, HP revenue fell as much as 18%. This is after adjusting for one-off revenue of Rs66 crore recorded in the July quarter and using dollar revenue calculated, based on the average realized rupee-dollar rate reported by the firm. MphasiS doesn’t report revenue in dollar terms.
The non-HP business, meanwhile, grew by over 10%, aided partly by an acquisition the company did effective end-August. Even after adjusting for the revenue of the acquired firm, organic growth was strong at 6.3%. But with the HP business accounting for approximately 65% of revenue, overall growth was weak. Total revenue in the October quarter, at $274 million (Rs1,416 crore today), was flat against the July quarter.
For the whole year, revenue grew by just 1.5%. Adjusted for the one-off revenue of Rs66 crore, revenue was flat. Needless to say, this is disappointing, considering the industry is growing in double digits.
According to an analyst in a foreign brokerage, MphasiS looks set for another year of single-digit growth because of the sluggish trend in revenue of the HP channel. The firm’s headcount fell 2% sequentially, after falling 1% in the July quarter. Evidently, the outlook isn’t very bright. What’s more, thanks to the company’s long-term hedges, it won’t fully benefit from the sharp depreciation in the rupee. MphasiS told analysts in a post-earnings call that it has hedged 70% of its foreign currency receivables over a 34-month period.
MphasiS’ shares have fallen over 45% in the past year, and although valuations look cheap, there may not be many takers, given the sluggish growth. Analysts at Emkay Global Financial Services Ltd say in a post-results note, “Valuations at around nine times October 2012 earnings, with cash at approximately 27% of market cap, will limit sharp absolute downsides for MphasiS. However, we see no end to operational challenges (read anaemic revenue growth) for MphasiS, although a weak currency should help alleviate sharp downside risks to margins in the near/medium term.”
• Losing path (PDF)
• Intraday movement (PDF)
PDF by Yogesh Kumar/Mint