MphasiS hopes to maintain operating margins; analysts cautious

MphasiS hopes to maintain operating margins; analysts cautious

Mumbai: MphasiS Ltd hopes to maintain operating margins between 15 and 18% by containing costs and growing its direct channel business, a senior official said on Friday, but analysts continue to be cautious on the mid-tier outsourcer’s performance going forward.

The firm, which follows a November-October financial year, had operating margins of 16.5% during February-April.

“For margins, there are additional impacts like forex, rupee appreciation and all which are beyond our control, but our intention is to retain EBIT margins between 15 to 18%," chief financial officer Ganesh Murthy said on a conference call with analysts.

Still, the company’s gross margins are way below that of its peers, said Vimal Gohil, analyst at Asit C. Mehta Investment Intermediates.

“We are very unhappy with the performance and lack of clarity. There are concerns going ahead."

MphasiS has been trying to expand its non-HP business and grow in emerging markets, thereby reducing its dependence on HP, which accounted for 67% of revenue during the quarter.

Hewlett-Packard Co, a major client for MphasiS, owns 60.52% stake in the Bangalore-based firm, according to Reuters data.

The HP-channel business has been sluggish for a while, and MphsaiS’ profits have been dented in the past due to price cuts offered to the US-firm.

Earlier this month, HP slashed its 2011 profit forecast as it prepares to spend heavily to revamp a troubled division that provides everything from computer maintenance to high-level tech consulting.

“The HP-business has de-grown 0.8% this quarter and the management is not very sure as to how it is going to develop going forward," Gohil said.

Angel Broking analyst Srishti Anand concurred.

“HP doesn’t really look promising the way it used to earlier and there is another price cut due," she said. “They do a price negotiation with HP every six months."

Chief executive Ganesh Ayyar, however, said there is no six-monthly cycle and HP periodically approaches MphasiS for rate reductions.

Murthy confirmed negotiations with HP are ongoing and would be concluded in a couple of months.

For the non-HP business, “pricing is going to remain stable with a slight uptick in some cases," he said.

Analysts have also been concerned about inadequate disclosures by the company, which had not disclosed certain exception items on time.

On Thursday, MphasiS posted a second-quarter consolidated net profit of Rs217 crore compared with Rs267 crore the year ago.

Revenue inched up 3% to Rs1,257 crore, but a 14% jump in cost of sales and services offset the slight rise in revenue and hurt profits.

A Reuters poll of brokerages had estimated the firm to post a net profit of Rs219 crore, an 18% drop from the previous year.

Shares of the company, which the market values at $2.08 billion, fell as much as 7% to Rs420, but later pared some losses to trade down 1%. The stock has lost 24% of its value in the past six months.