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MphasiS: HP business continues to be a drag

MphasiS: HP business continues to be a drag
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First Published: Thu, Aug 25 2011. 11 08 PM IST
Updated: Thu, Aug 25 2011. 11 08 PM IST
MphasiS Ltd hasn’t yet recovered after the sharp drop in profit it witnessed in the quarter ended January. Adjusted for one-offs, revenue was flat and margins fell by more than 200 basis points. With no signs of a recovery in the company’s performance, it’s not surprising that the stock fell more than 7.5% on Thursday. One basis point is one-hundredth of a percentage point.
The MphasiS stock has now dropped more than 40% since its shocking January quarter earnings announcement, when revenue had declined 8% and net profit had dropped 20%, after a fresh round of price cuts by its top shareholder and client, Hewlett-Packard Co. (HP).
Also See | Earnings Downer (PDF)
Revenue from HP fell again last quarter, albeit at a lower rate of 1.1%, after adjusting for one-time revenue. The company reversed a credit note of Rs 66 crore related to an earlier period, while on the other hand, it did not book revenue of Rs 34 crore because of incomplete documentation. On a net basis, therefore, it benefited from the one-off revenue of around Rs 32 crore. Adjusted for this, profit margin fell by more than 200 basis points and profit declined by around 10% quarter-on-quarter.
MphasiS reported a drop in onsite billing rates in the mainstay applications services business, giving the impression that the pressure of price negotiations from HP is continuing. But the company clarified that the drop in average billing rates is not owing to price cuts, but because it is now using fewer sub-contractors and, hence, the rate charged to customers has commensurately come down.
MphasiS has been trying hard to grow its non-HP business, but the growth in this segment at 2.9% was far from impressive last quarter. Since the HP business still accounts for two-thirds of revenue, business from other clients needs to grow at a much faster pace to drive overall growth. The HP business, of course, has been a drag for the past few quarters.
Given the weak financial performance, the only ray of hope for investors seems to be the possibility of an open offer from HP to buy out minority shareholders. But that’s hardly a strong enough reason to hang on to an investment in the troubled company.
Graphics by Yogesh Kumar/Mint
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First Published: Thu, Aug 25 2011. 11 08 PM IST