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Good quarter for Mphasis, but headwinds ahead

Good quarter for Mphasis, but headwinds ahead
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First Published: Thu, Aug 20 2009. 11 02 PM IST

Updated: Thu, Aug 20 2009. 11 02 PM IST
At a conference call to discuss results for the quarter ended 31 July, the Mphasis Ltd management clearly said that while the market has stabilized, there are no signs of a rebound. They said the current environment is no ordinary downturn and that they have to adapt to the “harsh reality of the market” and be prepared for price renegotiations every quarter. In reply to a question, they did not deny the possibility of a re-negotiation downwards even in the business obtained through its parent company Hewlett-Packard Co. (HP) which accounts for 69% of their total business. (Business in which HP is the end-customer is around 10-12% of the total business, according to the management.)
Analysts were worried that pricing pressures and rupee appreciation would crimp Mphasis’ performance, but results for the quarter ended 31 July have been good. Compared with the previous quarter (three months ended 30 April), group revenue, net of transfer from hedging reserves, rose by 5.4% to Rs1,105 crore, with the growth led by the infrastructure technology outsourcing (ITO) business, followed by application services.
Graphics: Ahmed Raza Khan / Mint
Operating profits rose by 6.2% over the preceding quarter to Rs240 crore, while operating margins expanded by 0.2% to 21.8%.
How did the company manage to offset pricing pressures and increase revenue? The management said a favourable forex hedge was sufficient to offset rupee appreciation during the quarter. Interestingly, billing rates for the quarter increased by a dollar an hour in the onsite applications business and the offshore IT outsourcing (ITO) segment, while they fell by a dollar an hour in the business process outsourcing or BPO business. They remained the same as in the previous quarter in other segments. This increase in billing rates was brought about by a change in the product mix. Also, utilization rates increased from the previous quarter, leading to higher revenues.
The number of employees came down 3% sequentially, with most of the attrition happening in the BPO business. Cost of revenue grew in line with revenue during the quarter, but selling expenses were 4.3% of revenue, compared with 4.5% during the preceding quarter.
In the July quarter, the application service business contributed 64% to revenue and 63% to profits; BPO accounted for 17% of revenue and 11% of profits; and in the fast growing ITO 19% of revenue and 26% of profits. The strategy is to increase volumes in the ITO business, as the utilization rate is already high. That would entail more hiring.
The company said it added seven new clients during the quarter, but concentration increased, with the top 10 clients contributing 48% of revenue, against 43% in the April quarter. But the management said it hoped to expand the business sourced through HP. The company’s cash balances went up to Rs650 crore from Rs355 crore at the end of the previous quarter, putting it in a better position to plan acquisitions.
The management said it would intensify cutting costs, but analysts point out that the company’s margins are likely to come under pressure, as it already has some of the lowest selling, general and administrative costs in the industry and some of the highest utilization rates and a high proportion of business offshore, thereby limiting the scope of cost cuts. As far as offsetting the pricing pressures through a better revenue mix was concerned, the management said it’s a “tough balancing act.” The stock has easily outpaced the BSE IT index, which limits the scope for further gains.
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First Published: Thu, Aug 20 2009. 11 02 PM IST