2 March 2012
1QFY12 Results Update | Sector: Technology
MphasiS
BSE SENSEX
S&P CNX
17,584
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,340
MPHL IN
210.1
488/277
12/16/0
90.6
1.8
CMP: INR431
TP: INR367
Downgrade to Sell
MphasiS reported 2% QoQ decline in USD revenues to USD271m v/s our expectation 1.3% growth in 1QFY12
(year-ending October). EBIT margin was 15% v/s our estimate of 17.9% due to hedge losses of INR257 on the
revenue line. PAT at INR1.85b came 14% below our estimate.
1QFY12 is the third consecutive quarter of headcount declines (down by 2,941 over the past three quarters)
indicating lower growth assumptions by the company for the future.
The company’s focus continues to be driven by cost containment v/s revenue growth. HP continues to be a
drag with USD revenues declining 8% QoQ.
We have cut our EPS estimates by 6% for FY12 and by 2% for FY13 due to the company’s underperformance in
1QFY12 and little indications of improvement in fundamentals.
The management’s commentary during the post result con-call reaffirmed our stance that the company is
more focused on cost-containment efforts as a larger portion of the business driven by HP continues to
decline. EBITDA margin is more likely to be at the lower end of the targeted 18-21% band as the company has
limited or no levers from utilization, pricing risk from the HP business and impending wage hikes effective
May 1, 2012, which could be higher than the industry as the company continues to see high attrition rates
(19% in the apps business and 22% in ITO).
Downgrade to
Sell
with a target price of INR367, which discounts FY13E earnings by 10x.
Nitin Padmanabhan
(Nitin.Padmanabhan@MotilalOswal.com); Tel: +91 22 3982 5426
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); Tel: +91 22 3982 5424

MphasiS
1QFY12 below estimates, HP continues to be a drag on growth despite
impressive growth in Direct channel, hedge losses in the top-line offset
currency tailwinds for margins
Mphasis' 1QFY12 revenue at USD271m was down 2% QoQ, and below our estimate of
1.3% QoQ growth. However, in INR terms, revenue at INR13.67b came only marginally
below our estimate of INR13.9b, due to greater QoQ depreciation in average INR
(7.3% v/s estimate of 5.3%)
INR revenue growth of 4.1% QoQ was on the back of 7.3% QoQ Rupee depreciation
Source: Company/MOSL
Sharp decline in HP channel led the sequential decline in revenues. Contribution
from HP channel declined 4pp QoQ to 58%, implying ~8% QoQ decline in revenues
from the HP channel. The company attributed this performance to seasonality and
shut down in certain projects.
Direct channel continued to grow handsomely, growing USD revenues by 8.3% QoQ
(INR revenues by 14.4% QoQ). We note that this growth also includes one month
revenues from the acquisition of Wyde. Two months' Wyde revenues amounting to
USD4m were booked in 4QFY11. We estimate ~USD2m of the incremental revenues to
be inorganic, adjusted for which, USD revenue growth of the direct channel would
have been 6.4% QoQ.
Onsite billing rates in Applications has come down to USD67 per hour from USD72 per
hour three quarters ago (and declined by 2.9% QoQ). While offshore billing rate in
Applications increased 5% QoQ to USD21per hour, this was attributed to optimal
deployment of resources leading to efficient project execution.
Despite 7.3% sequential depreciation of Rupee, EBITDA margin expansion was only
60bp QoQ due to INR257m hedge losses on the top-line, which impacted the margins
negatively by 160bp.
2 March 2012
2

MphasiS
EBITDA margin increased only 60bp QoQ despite currency tailwind due to hedge losses on top-
line and 38% INR billing (%)
Source: Company/MOSL
Sluggish company-level revenue growth and downbeat margins drove PAT at INR1.85b
came way below our estimate of INR2.15b.
Third consecutive quarter of headcount decline drives utilization higher, an
indicator of low growth assumptions by the company for the future
Mphasis' focus on improving the margins by driving up utilization has seen its overall
headcount come down for the third consecutive quarter. Headcount in 1QFY12
declined by 1,628 employees to 38,798. Over the last three quarters, the headcount
has declined by 2,941 employees. Utilization in Applications has gone up by 900bp
over the past four quarters to 80% and over this period, ITO utilization is up 1100bp to
79%.
Driving utilization up aggressively would leave little room to keep a slack for growth,
and that indicates muted visibility as far as growth is concerned. Also, were growth to
surprise the company's own estimates, at such high utilization, the preparedness to
capture the same will be little, and any growth would have to come at the expense of
high attrition, and hence, margins.
Headcount declined for the third consecutive quarter (nos)
Source: Company/MOSL
2 March 2012
3

MphasiS
Limited lever from utilization to grow margins going forward (%)
Source: Company/MOSL
Takeaways from management commentary
Outlook on revenue growth:
Visibility on revenues from the HP channel continues
to remain bleak. Mphasis' growth from that segment will directly depend on the
performance of HPES . While the company is seeing deal signings in Direct channel,
discretionary spends are still under pressure and a few clients are looking at
consolidating vendors.
Pricing may come under pressure, but management's stance firm for now:
The
management indicated that there was no pricing discussion triggered by HP during
the quarter. However, we note that HP, in its recent commentary post the results
indicated that the pricing had come down in all the deals it had renewed. We see
this as a key risk to Mphasis' rate card for HP, though the management maintained
that any pricing revision will be a function of a secular trend in pricing across the
industry.
Lower margin sensitivity to exchange rate fluctuations:
7.3% sequential
depreciation in average INR rate had only 40bp positive impact on margins due to
two reasons: [1] the company has a long term hedging policy and 70% of the next
12 months revenues are covered, gains/losses from which are adjusted in the
top-line (INR257m losses in 1QFY12) and [2] Mphasis has a lower sensitivity to
exchange rate fluctuations given that ~38% of the billing is in INR: 11% domestic
revenues and remaining 27% are INR contracts with clients in the HP channel.
Billing rates movement in 1QFY12:
2.9% QoQ decline in onsite billing rates in
Applications was attributed to a top-5 client (in the Direct channel), the contract
with whom had a clause pertaining to currency fluctuations. Significant
depreciation of the INR breached the threshold as a result of which, the billing
rate had to be revised downwards. The same will be restored upwards on
appreciation. Also, 5% offshore billing rate increase in Applications was on account
of productivity gains, and the management expressed its confidence in sustaining
the rates.
Commentary on margins:
The company will continue its cost aggression in its
efforts to main EBITDA margin in the 18-21% band. It is following a strict sales
discipline and ensuring that it does not sign any deals below a stipulated margin
level.
2 March 2012
4

MphasiS
Deployment of cash:
Mphasis stock saw a run up in the recent weeks on
anticipation of buyback of shares. However, the management indicated that there
was no discussion around buybacks taken up in the current board meeting and it
is actively scouting for acquisitions.
Revising estimates downwards on continued stresses in the business,
downgrade to Sell
We revise our EPS estimates downwards by 6% for FY12 and 2% for FY13 on the back of
underperformance in 1QFY12 and little signs of improvement in fundamentals. We
expect revenues in FY12 to remain flat at USD1.11b, and grow at a CAGR of 4.2% over
FY11-13. However, amid declining margins on lower growth see an EPS CAGR of -3.5%
over this period.
The stock saw a significant run-up in the recent weeks on anticipation of buyback
announcement from the company, which has not materialized yet. In any case, we
believe that the buyback would only act as a temporary support for the stock, and
expect it to trade lower going forward. We downgrade Mphasis to
Sell.
Our target
price of INR367, which discounts FY13 earnings by 10x implies a 15% downside.
Other result highlights
Cash and equivalents increased by INR1.16b to INR21.8b (24% of MCap)
The company added 28 clients during the quarter (v/s 25 additions in 4QFY11), 17
of which were from the Direct Channel.
Attrition rates: Applications - 19%, ITO - 22%
DSO at 88 days remained flat QoQ
Revenues from FPP were at 12% (v/s 13% in 4QFY11)
USD hedges stand 429m, v/s USD462m in 4QFY11.
2 March 2012
5

MphasiS
Growth mix
Jan-10
Growth by Service Type (%)
Application Maintenance & Other Services
Application Development
Customer Service
Service/Technical Help Desk
Transaction Processing Service
Infrastructure Management Services
Knowledge Processes
Total
Growth by Delivery Location (%)
Onsite
Offshore
Total
Growth by Clientele (%)
Revenues from Top Client
Revenues from Top 5 Clients
Revenues from Top 10 Clients
Revenues from Non-top 10
Revenues from Top 2-10 Clients
Revenues from Top 2-5 Clients
9
9
-7
9
0
-15
-10
3
7
2
3
6
9
4
8
3
12
Apr-10
2
7
-13
-1
-8
16
-13
3
3
2
3
-6
-1
5
1
9
2
Jul-10
2
-4
-3
3
10
48
-18
6
16
2
6
5
1
5
5
5
-1
Oct-10
4
8
-7
7
15
4
-17
5
9
3
5
-4
2
5
5
8
5
Jan-11
-6
-12
2
-37
-6
4
-28
-8
-9
-7
-8
-8
-4
-10
-6
-3
-19
Apr-11
-3
0
23
49
-2
4
-32
2
-1
4
2
2
-1
2
2
-3
9
Jul-11
7
4
-5
-17
-12
7
-1
3
-12
10
3
3
10
3
3
14
-10
Oct-11
-8
11
8
8
-2
11
-1
3
19
-2
3
Jan-12
2
5
-3
-16
12
12
8
5
6
5
5
3
5
3
9
3
5
3
5
3
10
3
-2
Source: MOSL
Key operating metrics
Jan-10
IT Services Revenue
Service Type
Application Maintenance & Other Services 4,507
As % of Sales
39
Application Development
3,296
As % of Sales
29
Customer Service
775
As % of Sales
7
Service/Technical Help Desk
679
As % of Sales
6
Trasaction Processing Service
678
As % of Sales
6
Infrastructure Management Services
1,315
As % of Sales
11
Knowledge Processes
274
As % of Sales
2
License Income
35
As % of Sales
0
Total
11,559
(d) Group - Revenues by delivery location
Onsite
3,424
As % of Sales
30
Offshore
8,135
As % of Sales
70
Total
11,559
Project Type
Time and Material
10,008
As % of Sales
87
Fixed Price
1,551
As % of Sales
13
Total
11,559
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
4,602
39
3,525
30
678
6
675
6
622
5
1,524
13
239
2
2
0
11,867
3,538
30
8,329
70
11,867
10,647
90
1,220
10
11,867
4,697
37
3,392
27
660
5
692
6
685
5
2,255
18
197
2
3
0
12,581
4,108
33
8,473
67
12,581
11,196
89
1,385
11
12,581
4,867
36
3,651
28
614
5
741
6
790
6
2,356
18
163
1
0
0
13,182
4,460
34
8,722
66
13,182
11,492
87
1,690
13
13,182
4,552
37
3,212
26
629
5
465
4
740
6
2,446
20
117
1
3
0
12,164
4,051
33
8,113
67
12,164
10,630
87
1,534
13
12,164
4,433
36
3,224
26
771
6
693
6
726
6
2,534
20
80
1
0
0
12,461
4,014
32
8,447
68
12,461
10,855
87
1,606
13
12,461
4,726
37
3,354
26
731
6
575
4
641
5
2,705
21
79
1
0
0
12,811
3,537
28
9,274
72
12,811
11,187
87
1,624
13
12,811
4,371
33
3,725
28
787
6
623
5
630
5
2,990
23
78
1
38
0
13,242
4,198
32
9,044
68
13,242
4,451
32
3,897
28
761
5
523
4
704
5
3,346
24
84
1
163
1
13,929
4,450
32
9,479
68
13,929
11,560
12,259
87
88
1,682
1,670
13
12
13,242
13,929
Source: MOSL
6
2 March 2012

MphasiS
Key operating metrics
Jan-10
Client Concentration
Revenues from Top Client
Revenues from Top 5 Clients
Revenues from Top 10 Clients
Clients Contributing more than
US$1 million Revenues
US$5 million Revenues
US$10 million Revenues
US$20 million Revenues
Receivables Days
Number of Employees
Onsite
Applications
BPO
ITO
Total Onsite
Offshore
Applications
BPO
ITO
Total offshore
Total People (Including SGA)
Utilization Rates
Applications
Excluding Trainees
Onsite
Offshore
Blended
Including Trainees
Onsite
Offshore
Blended
BPO - Process Utilization
Excluding Trainees
Including Trainees
ITO
Excluding Trainees
Including Trainees
Onsite
12
31
44
105
34
22
9
77
Apr-10
11
30
45
106
37
22
11
76
Jul-10
11
29
45
109
39
22
13
78
Oct-10
10
28
45
115
38
23
14
83
Jan-11
10
29
44
119
38
22
14
94
Apr-11
10
28
44
119
39
25
14
89
Jul-11
10
30
44
120
41
24
12
91
Oct-11
10
30
44
120
43
24
12
88
Jan-12
10
31
44
122
41
25
12
88
1,854
150
43
2,047
10,676
17,288
5,679
33,643
35,690
1,813
153
56
2,022
12,241
16,603
6,253
35,097
37,119
2,613
167
326
3,106
13,031
16,367
7,467
36,865
39,971
2,751
210
459
3,420
13,189
15,183
8,170
36,542
39,962
2,675
478
192
3,345
12,657
15,469
8,126
36,252
41,059
2,761
378
153
3,292
12,459
16,246
8,244
36,949
41,739
2,748
315
149
3,212
12,799
15,693
8,063
36,555
41,264
2,692
314
141
3,147
12,682
15,132
7,950
35,764
40,426
2,716
308
121
3,145
11,820
14,830
7,503
34,153
38,798
85
78
79
85
77
78
76
70
85
79
83
87
75
77
87
73
75
76
70
80
76
83
90
72
75
90
70
73
79
71
90
72
79
90
74
77
90
72
75
82
74
81
66
81
87
71
74
87
69
72
80
69
71
68
77
89
76
78
89
73
76
78
68
75
73
78
87
76
78
87
73
76
76
66
76
75
76
92
78
80
92
72
76
78
70
84
80
91
Source:
91
80
82
91
74
77
79
71
82
79
79
MOSL
2 March 2012
7

MphasiS
MphasiS: an investment profile
Company description
Mphasis, an HP-EDS company is amongst the top IT
service providers from India. It has a balanced mix of
Application and BPO businesses, with good growth in
ITO business, and support of its US-based parent, HP-
EDS. Mphasis employs over 38,000 people.
HCC Medical Insurance Services, LLC (HCCMIS), is the
third client to go live with Javelina, Eldorado's
award-winning payer platform. HCCMIS is one of the
world's largest web-based insurance providers
Valuation and view
We expect Revenue CAGR of 4.2% and EPS CAGR of
-3.5% over FY11-13.
Stock trades at a P/E of 11x FY11 and 12.4x FY12E.
We downgrade to
Sell,
with a target price of INR367,
based on 10x FY12E earnings.
Key investment arguments
Credible tier-II Indian IT services vendor, with
balanced offerings in Applications, BPO and ITO.
Subsidiary of HP, the second largest IT service
provider in the world.
Focus and efforts towards growing the Direct Channel
bearing fruit.
Net cash per share of INR103 suggest ample leeway
to deploy cash in new opportunities.
Sector view
In the last few months, increasingly weak macro
economic data have been emanating from both the
US and Europe, which implies deceleration in growth
for Indian IT services.
Initial commentary on CY12 budgets indicates a
moderation in growth across the sector, resulting
from a possible 3-4% cut in budgets as in 2003 (v/s 6-
8% in CY08).
We reckon frontline Indian IT companies would be
better placed to sail through the near-term
challenges mentioned above. Niche IT/ITeS services
companies with strong business models are also
likely to be better placed to face uncertainties in
the near term
Key investment risks
Slower than expected ramp-up in the direct channel.
Continued sluggishness in the HP business.
Pressure on margins on high attrition and increased
investment.
Recent developments
The company added 28 new clients in 1QFY12, 17 in
the Direct channel
Comparative valuations
MphasiS*
FY12E
FY13E
P/BV (x)
FY12E
FY13E
EV/Sales (x) FY12E
FY13E
EV/EBITDA (x) FY12E
FY13E
* YE October; # YE June
P/E (x)
12.4
11.7
2.0
1.8
1.3
1.2
7.2
6.5
Tech Mahindra
8.8
9.2
1.8
1.4
1.8
1.4
9.0
7.6
HCLT#
14.7
13.0
3.2
2.7
1.6
1.3
8.6
8.0
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
34.9
36.7
Consensus
Forecast
38.3
37.8
Variation
(%)
-8.9
-2.9
FY12
FY13
Target price and recommendation
Current
Price (INR)
431
Target
Price (INR)
367
Upside
(%)
-14.8
Reco.
Sell
Stock performance (1 year)
Mpha s i S
500
440
Sens ex - Reba s ed
Shareholding pattern (%)
Dec-11
Promoter
Domestic Inst
Foreign
Others
2 March 2012
60.5
6.7
20.3
12.5
Sep-11
60.5
11.4
20.3
7.8
Dec-10
60.5
8.0
18.0
13.5
380
320
260
Ma r-11
Jun-11
Sep-11
Dec-11
Ma r-12
8

MphasiS
Financials and valuation
2 March 2012
9

Disclosures
This report is for personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement
to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been
furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates
or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
The information contained herein is based on publicly available data or other sources believed to be reliable. While we would endeavour to update the information herein on reasonable basis, MOSt and/or its
affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or
employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report . MOSt or any of its affiliates
or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness
for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.
This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision
based on this report or for any necessary explanation of its contents.
MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest
Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered
MphasiS
No
No
No
No
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or
will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible
for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to
law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.
For U.K.
This report is intended for distribution only to persons having professional experience in matters relating to investments as described in Article 19 of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (referred to as "investment professionals"). This document must not be acted on or relied on by persons who are not investment professionals. Any investment or investment activity to
which this document relates is only available to investment professionals and will be engaged in only with such persons.
For U.S.
MOSt is not a registered broker-dealer in the United States (U.S.) and, therefore, is not subject to U.S. rules. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange
Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S.,
Motilal Oswal has entered into a chaperoning agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo").
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional
investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major
institutional investors and will be engaged in only with major institutional investors.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, Marco
Polo and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
Motilal Oswal Securities Ltd
3rd Floor, Hoechst House, Nariman Point, Mumbai 400 021
Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: reports@motilaloswal.com