30 August 2012
3QFY12 Results Update | Sector: Technology
MphasiS
BSE SENSEX
S&P CNX
17,542
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,315
MPHL IN
210.0
439/277
-5/-11/3
80.6
1.4
CMP: INR384
TP: INR350
Sell
Mphasis' 3QFY12 (quarter ending July; October year-end) re-emphasized the company's continued focus on
profitability and limited growth visibility as it continued to increase utilization by cutting headcount in
Applications, and to rationalize costs.
Revenue was INR13.55b, +2% QoQ, marginally below our estimate of INR13.88b. HP channel declined 6.2%
QoQ in constant currency while Direct channel revenue grew 5.8% QoQ in constant currency. Despite wage
hikes, EBITDA margin at 19.7% was flat QoQ (in line) on continued cost control measures. PAT was INR2.09b,
higher than our estimate of INR1.99b due to lower tax rate (22.7% v/s est 23.5%) and higher other income
(INR393m v/s est INR329m).
Management commentary indicated little respite over the near term from the challenges in the HP channel,
as the ramp-down pressures may persist over the next few quarters. On the other hand, it expects to outgrow
the industry in the Direct Channel, amid troubled deal velocity. Thrust on utilization of cash implies chances
of a buyback in case there are no large acquisitions on the anvil over the foreseeable future.
Our estimates are little changed after the results. Mphasis' focus on profitability by running a tight ship not
only highlight poor growth visibility in the near term, but also concerns us as far as the long term prospects go.
This is mainly because even when the environment improves; the company may have to grapple with high
attrition rates and wage hikes to lateral employee base - a headwind to margins; let alone sacrifice some
growth due to high utilization.
Healthy cash pile and buyback expectations may support valuations, but mitigation of structural growth
concerns is imperative before we draw more comfort in the stock. Maintain
Sell.
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
Investors are advised to refer through disclosures made at the end of the Research Report.
1

MphasiS
3QFY12: Revenue and OPM in line while PAT above estimate; cost
rationalization continues to aid margin expansion
Revenue was INR13.55b, +2% QoQ, marginally below our estimate of INR13.88b,
despite a favorable currency realization of INR55.8/USD (v/s our assumption of INR54.7/
USD). This was partly due to higher forex losses in the revenue line (INR502m v/s
estimate of INR400m).
Net revenues grew 2% QoQ, but declined in constant currency
Source: Company, MOSL
EBIT margin expanded 50bp QoQ to 16.7% (in line with our estimate of 16.6%). EBITDA
margin at 19.7% was flat QoQ (v/s our estimate of 19.6%). Selling expenses increased
20bp QoQ to 5.4% (v/s estimate of 5.2%) and G&A expense at 4% was flat QoQ and in
line with our estimate.
EBITDA margin was flat despite 200bp wage hike impact, due to continued cost aggression
Source: Company, MOSL
Wage hikes of 3% onsite and 8% offshore impacted margins negatively by 200bp.
However, continued cost rationalization through lower headcount in Applications
(i.e. higher utilization) and facilities' consolidation helped stem the margin decline.
With ~37% of the revenue bookings in INR currency and 70% of the next 4 quarters'
net foreign currency inflows hedged, MPHL's OPM sensitivity to currency changes is
minimal (5-10bp for 1% move in currency).
30 August 2012
2

MphasiS
Net employee increase was primarily due to 1,409 additions to offshore BPO headcount
Blended utilization near all-time high (including trainees)
Source: Company, MOSL
PAT was INR2.09b v/s estimate of INR1.99b, led by lower tax rate (22.7% v/s est 23.5%)
and higher other income (INR393m v/s est INR329m).
HP Enterprise Services channel declines on ramp-downs while growth
rebounds in the Direct Channel
Revenue from HP channel declined 6.2% QoQ in constant currency and 2.3% QoQ in
reported currency to INR7.7b. Ramp-downs in few projects led the decline. Clients in
the HP channel contributing USD20m+ to Mphasis' revenue came down to 5 in 3QFY12
from 7 in the previous quarter. Within the HP channel, non-HPES segment grew 16%
QoQ to INR688m. Over 9MFY12, Mphasis has amassed ~USD34m from HP's non-
enterprises segment, while the company guided for USD50-60m revenues from the
segment over the full year.
Direct channel revenue grew 5.8% QoQ in constant currency and 12.6% in reported
currency to INR6.3b. The company added 24 clients during the quarter, 20 of which
were in the Direct Channel.
Among verticals, Banking & Capital Markets (BCM) was the key driver of revenues
(+5.7% QoQ) , while among Services, growth was driven by Development (+5.9% QoQ)
and IMS (+5.6% QoQ).
30 August 2012
3

MphasiS
BCM was the key needle mover of growth, while among Services Development and IMS were the key growth contributors
Source: Company, MOSL
Commentary unchanged, indicating continued ramp-down pressures in the
HP channel and focus on profitability
Mphasis' commentary indicated little respite over the near term from the challenges
in the HP channel, as the ramp-down pressures may last over the next few quarters.
Revenues from HP Channel have declined to INR7.7b in 3QFY12 from INR9.2b in
4QFY10.
HP Channel sluggishness expected to continue in the coming quarters
Source: Company, MOSL
As far as the Direct Channel is concerned, Mphasis expects to outgrow the industry.
However, the outlook on the environment remained cautious, as deal closures
continue to take long.
As visibility on revenue growth over the near term appears weak, the company
continues to focus on profitability, which has resulted in EBIT margin expansion from
14.7% in 4QFY11 to 16.7% in 3QFY12. Utilization excluding trainees in Applications
increased from 71% in 1QFY11 to 83% in 3QFY12. Applications Headcount was 15,547
in 3QFY11, down to 12,727 in 3QFY12.
Application of cash remains a priority for Mphasis, implying chances of a buyback if
there are no large acquisitions on the anvil over the foreseeable future.
30 August 2012
4

MphasiS
Cash continues to pile up, mulling over a share buyback
Source: Company, MOSL
Estimates largely unchanged; running a tight ship introduces additional risk
of failure to capitalize when environment improves
Our estimates are little changed after the results. 1.5%/2.1% downward revisions in
Mphasis' USD revenue estimates for FY12/FY13 are a function of our 1.1%/2.9% revision
in INR assumptions, considering ~37% of the company's revenues are booked in that
currency. Also, the depreciated currency assumptions do not have any significant
impact on the company's OPM given its low sensitivity, due to INR contracts and
hedging of net inflows which is reported in the topline.
Mphasis trades at 10.3x FY12E and 9.9x FY13E earnings. While near-term challenges
prevail, the company's focus on driving profitability through headcount cuts and higher
utilization concerns us on prospects over a longer time frame. In our opinion, even
when the environment improves, the company may have to grapple with high attrition
rates and wage hikes to lateral employee base, impacting margins. Besides, it may
even have to give up some growth due to the high utilization levels. Healthy cash pile
and buyback expectations may support valuations, but mitigation of structural growth
concerns is imperative before we draw more comfort in the stock. Maintain Sell.
Revised estimates
Revised
FY12E
FY13E
53.1
52.2
1,042
1,075
16.2
16.4
37.3
38.6
Earlier
FY12E
FY13E
52.5
50.8
1,058
1,097
16.0
16.6
36.1
38.1
Change (%)
FY12E
FY13E
1.1
2.9
-1.5
-2.1
18bp
-17bp
3.1
1.4
Source: MOSL
INR/USD
USD Revenue (m)
EBIT Margin (%)
EPS (INR)
Other result highlights
30 August 2012
Overall headcount increased by 458 QoQ to 37,637
Cash and cash equivalents increased by INR2.37b during the quarter to INR25.75b
Revenue proportion from offshore reduced by 1% QoQ to 68%
Outstanding hedge book at the end of the quarter stands at ~USD440m
OCI losses on the Balance Sheet stand at INR1.76b
Revenue proportion from Fixed Price contracts remained stable QoQ at 14%.
5

MphasiS
Key operating metrics
Jul-10
IT Services Revenue
Service Type
Application Maintenance & Other Services 4,697
As % of Sales
37
Application Development
3,392
As % of Sales
27
Customer Service
660
As % of Sales
5
Service/Technical Help Desk
692
As % of Sales
6
Trasaction Processing Service
685
As % of Sales
5
Infrastructure Management Services
2,255
As % of Sales
18
Knowledge Processes
197
As % of Sales
2
License Income
3
As % of Sales
0
Total
12,581
Group - Revenues by delivery location
Onsite
4,108
As % of Sales
33
Offshore
8,473
As % of Sales
67
Total
12,581
Project Type
Time and Material
11,196
As % of Sales
89
Fixed Price
1,385
As % of Sales
11
Total
12,581
Client Concentration
Revenues from Top Client
11
Revenues from Top 5 Clients
29
Revenues from Top 10 Clients
45
Clients Contributing more than:
US$1 million Revenues
109
US$5 million Revenues
39
US$10 million Revenues
22
US$20 million Revenues
13
Receivables Days
78
Number of Employees
Onsite
Applications
2,613
BPO
167
ITO
326
Total Onsite
3,106
Offshore
Applications
13,031
BPO
16,367
ITO
7,467
Total offshore
36,865
Total People (Including SGA)
39,971
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
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
10
28
45
115
38
23
14
83
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
10
29
44
119
38
22
14
94
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
10
28
44
119
39
25
14
89
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
10
30
44
120
41
24
12
91
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
11,560
87
1,682
13
13,242
10
30
44
120
43
24
12
88
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
12,259
88
1,670
12
13,929
10
31
44
122
41
25
12
88
4,662
34
3,473
26
778
6
509
4
686
5
3,292
24
81
1
47
0
13,528
4,150
31
9,378
69
13,528
11,649
86
1,879
14
13,528
10
31
44
126
42
24
12
80
4,643
33
3,678
26
761
5
584
4
756
5
3,475
25
83
1
73
1
14,053
4,523
32
9,530
68
14,053
12,095
86
1,958
14
14,053
9
31
44
129
41
24
10
85
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
2,496
312
116
2,924
2,441
307
101
2,849
10,966
10,286
14,844
16,253
7,010
6,844
32,820
33,383
37,179
37,637
Source: MOSL
30 August 2012
6

MphasiS
Key operating metrics
Jul-10
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
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
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
91
80
82
91
74
77
79
71
82
79
79
93
82
84
93
77
80
80
71
86
82
82
Source:
94
83
85
94
79
82
80
70
86
85
82
MOSL
30 August 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 37,000 people.
First license sale of the Wynsure insurance platform
after the acquisition of Wyde for a TCV of USD2.4m.
Valuation and view
We expect Revenue CAGR of -1.9% and EPS CAGR of
-1% over FY11-13.
Stock trades at a P/E of 10.3x FY12E and 9.9x FY13E.
Maintain
Sell,
with a target price of INR350, based
on 9x FY13E 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
reducing the HP concentration risk.
Net cash per share of INR123 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.
Commentary on CY12 budget spends indicate a
moderation in growth across the sector, resulting flat
to marginally lower budgets.
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 Direct channel.
Continued sluggishness and pricing risk in the HP
business.
Pressure on margins on high attrition.
Recent developments
The company added 24 new clients in 3QFY12, 20 in
the Direct channel.
Comparative valuations
MphasiS*
P/E (x)
FY13E
FY14E
P/BV (x)
FY13E
FY14E
EV/Sales (x) FY13E
FY14E
EV/EBITDA (x) FY13E
FY14E
* YE October; # YE June
10.3
9.9
1.8
1.5
1.1
1.0
5.6
4.9
Tech Mahindra
9.3
8.9
1.9
1.4
1.9
1.4
7.6
7.2
HCLT#
12.5
11.8
2.9
2.5
1.5
1.2
7.9
7.2
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
37.3
38.6
Consensus
Forecast
37.3
38.9
Variation
(%)
0.1
-0.7
FY12
FY13
Target price and recommendation
Current
Price (INR)
384
Target
Price (INR)
350
Upside
(%)
-8.9
Reco.
Sell
Stock performance (1 year)
Shareholding pattern (%)
Jun-12
Promoter
Domestic Inst
Foreign
Others
30 August 2012
60.5
6.1
22.0
11.4
Mar-12
60.5
6.3
21.6
11.7
Jun-11
60.5
6.3
20.4
12.9
8

MphasiS
Financials and valuation
30 August 2012
9

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MphasiS
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