Mphasis Ltd shares have risen about 4% since it announced good results for the June quarter last week. But before arriving at the conclusion that the markets were pleasantly surprised with the results, note that even NSE’s CNX IT index has risen by about 4% during the same period.
The company announced detailed results of the Mphasis-EDS India combine for the first time, as the legal procedure of the merger is now complete. As the merger was effective 1 April 2006, a year-on-year comparison of the numbers is possible. Revenues have grown by an impressive 41.5%, while a sustained increase in synergy benefits have led to a 131.6% jump in operating profit. Net profit growth was lower at 57.4% due to losses on account of restatement of foreign-currency-denominated current assets after the appreciation in the rupee.
Revenue growth was driven by infrastructure technology outsourcing (ITO) services, which grew by 242% and now accounts for over 11% of total revenues. This business, being done by EDS India, accounted for less than 5% of combined revenues a year ago. Importantly, the ITO part of the business saw a 5% increase in average billing rates on a sequential basis. The applications business within the IT services business grew by 31% and the BPO business grew by 35% on a y-o-y basis. Apart from the ITO business, which saw a marginal dip in profit margin, the applications business and the BPO division saw a surge in profitability at the gross profit level, thanks to synergy benefits. Further, since selling, general and administrative expenses have rationalized, and operating margin has improved a lot.
Although the company declared detailed results of the combined entity for the first time last week, it had disclosed unaudited results of EDS India for the March quarter; so the markets were clued in on what to expect post merger. What’s more, the stock has been trading at well over 30 times trailing earnings for some time now, indicating that high growth was expected.
Analysts expect earnings to grow by over 50% for financial year 2007-08, driven by business from EDS’s internal work and the high possibility of getting a chunk of the large orders won by EDS globally. But the stock seems to have factored in the high growth expectations. Its one-year forward price-earnings multiple works out to about 23 times, not much lower than Infosys’ valuation of 24 times forward earnings.
The Centurion Bank of Punjab Ltd stock has been completely unaffected by the uncertainty in the market, gaining more than 10% in the past week. Centurion Bank of Punjab should not be judged by its tepid net profit growth of 15% in the June quarter, compared with the year-ago period. That is because the bank is now subject to an effective tax rate of 35%, compared with 6% in the same quarter last year. Profit before tax, which would be a better comparison, rose 66%. With advances growing 60%, that’s not such a surprise.
Net interest margin (NIM) is slowly being squeezed, as the high rate of credit growth is funded through relatively high-cost deposits. NIMs fell from 4.38% in the March quarter to 3.6%, although the discontinuation of interest on cash reserve ratio balances was also responsible for the fall. One reason for the lower margins is the fall in the proportion of low-cost current and savings account (Casa) deposits. The percentage of Casa deposits to total deposits went down to 28% in the June quarter, from 31% at the March end. The cost of deposits went up to 7.4%, compared with 5.6% for FY07.
Net interest income was up 17%, compared with growth of 43% last fiscal. Asset quality continued to take a hit, primarily due to the bank’s large portfolio of two-wheeler loans, despite significantly higher provisions. The bank has, however, switched to financing other assets and mortgages and personal loans now constitute a larger proportion of advances than do two-wheeler loans. The bank’s cost-to-income ratio also deteriorated slightly, compared with the March quarter.
Such a high rate of credit growth has resulted in an insatiable appetite for capital. The bank will be diluting equity once again, with a QIP issue of Rs500 crore. In the March quarter, it had made a preferential placement of equity shares. As a result, there’s hardly any y-o-y growth in earnings per share. But that hasn’t stopped the stock from outperforming the Bankex.
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