4 April 2016
Update
| Sector:
Technology
Mphasis
Neutral
BSE SENSEX
25,400
S&P CNX
7,759
CMP: INR454
TP: INR520(+14%)
Blackstone to acquire HP’s stake
~USD200m annual revenue visibility from HPE welcome
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
12M Avg Val (INR M)
Free float (%)
MPHL IN
210.2
534/363
3/15/26
95.4
1.5
97
39.5
Blackstone acquires HPE stake, triggering open offer for 26% minority
shares
Financials Snapshot (INR b)
Y/E Mar
2016E 2017E 2018E
Sales
61.1
63.5
73.1
EBITDA
8.9
9.7
11.4
PAT
7.2
7.7
8.6
EPS (INR)
34.2
36.5
40.7
EPS Gr. (%)*
5.9
7.0
11.5
BV/Sh. (INR)
276.6 288.0 301.1
RoE (%)
12.7
12.9
13.8
RoCE (%)
13.2
14.1
16.1
P/E (x)
13.3
12.4
11.1
P/BV (x)
1.6
1.6
1.5
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Dec-15 Sep-15 Dec-14
60.5
9.0
23.1
7.2
60.5
8.3
20.4
10.8
60.5
4.5
26.5
8.6
Blackstone India has entered into a definitive agreement with HPE (HP
Enterprise) to buy a majority stake in Mphasis. HPE currently owns 60.5% of
Mphasis. Blackstone will pay a purchase price of INR430 per share to HPE.
This will trigger a mandatory open offer for a purchase of additional 26%
shares of the company (open offer @INR457.54/share) and the acquiring entity
has released a public announcement to the stock exchanges. Based on the
open offer subscription, the purchase price consideration will vary between
INR54.66b and INR70.71b (or, approximately USD825m - USD1.1b).
HPE and Blackstone have agreed a Master Services Agreement (MSA) which
HPE proposes to sign with Mphasis, post approval by Mphasis’ Board of
Directors and shareholders. The duration of the MSA is five years with three
automatic renewals of two years each. Under this MSA, HPE has proposed to
commit a minimum revenue amount escalating year over year and totaling
USD990m over the next five years
Two clear positives – Visibility of HP revenues and new logos in Direct
business
FII Includes depository receipts
Stock Performance (1-year)
MphasiS
Sensex - Rebased
560
490
420
350
280
The MSA with minimum revenues totaling USD990m over 5 years lends
visibility to revenues from the HP Channel for MPHL, which is positive, and also
implies bottoming out of revenues from HP business near current levels.
Mphasis will be included in HPE’s Preferred Provider Program opening up
significant additional revenue opportunities.
Secondly, Blackstone cited the synergy of exposing its portfolio as potential
clientele for MPHL, implying some leads for the Direct channel business as well.
MPHL could leverage these specially to create more credible references in its
focus areas of Digital and GRC. Blackstone India has entered into a definitive
agreement with HPE (HP Enterprise) to buy a majority stake in Mphasis. HPE
currently owns 60.5% of Mphasis. Blackstone will pay a purchase price of
INR430 per share to HPE.
One multiple accretive possibility – could the dividend be upped given the
base on books?
Net cash on MPHL’s books stands at INR112 at present, 24.5% of CMP. This is
one obvious avenue of efficiency for Blackstone, to improve the capital
allocation, return ratios and consequently valuation multiple. We saw this with
HEXW too, where healthy payout ratios have meant a premium multiple to
even some of the better performing peers.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Ashish Chopra
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
Sagar Lele
(Sagar.Lele@MotilalOswal.com); +91 22 3982 5585

Mphasis
MPHL trades at ~10x operational income – and the scope of expansion in which
is healthy given three-pronged possibility of: [1] Improved HP Channel revenues,
[2] New logos in Direct Channel and [3] Improved Payout ratios.
The overhangs: Pricing uncertainty and prevailing Digital ‘Risk’
Apart from the value of USD990m over 5 years, any other details concerning the
modalities of the deal remain unknown. Whether there is a risk to pricing and
profitability as a result over the foreseeable future remains to be seen.
Also, key prevailing concern at MPHL has been the revenues from Digital Risk.
Currently at a run rate of USD40m per quarter, this could decline to ~USD30-
35m after completion of a couple of projects, and revival will be subject to deal
wins. We are currently modeling USD160m in FY18 from Digital Risk, while it
may taper to USD130-140m annualized run-rate in the near term.
Change in estimates: Factoring HPE business visibility
With immediate effect, we have revised our estimates to factor ~USD200m
revenues from HPE in FY18 v/s USD175m earlier. We were already estimating
USD196m from HPE in FY17, which sees no significant change.
Consequently, our earnings estimate is up 2% for FY18 to INR40.7, and
unchanged at INR37 for FY17.
Exhibit 1: HP under pressure since the last many quarters
HP Channel
250
200
150
100
50
71 70 69
67 67
62 58 58
55 54 52
% of Total Revenues
80
70
60
50
40
30
20
46
41 40
37 36 36 36 35
31 29
27 24
Source: MOSL, Company
Exhibit 2: Digital Risk revenue expected to decline over the next two quarters
Digital Risk Rev. (USD m)
34.2
42.5
46.3
45.5
29.6
38.0
34.0
22.4
30.8
38.0
40.8
39.9
Source: MOSL, Company
4 April 2016
2

Mphasis
Valuation and view
Our FY17 revenue estimate stands at USD948m compares with FY13 (YE
October) annual revenues of USD1,025m. Revenues from the HP channel have
posted a decline in 18 of the last 20 quarters and now constitutes to ~24% of
total revenues. The contribution of the HP channel has significantly reduced in
the portfolio, but finally there has been some reprieve in the form of an MSA
with ~USD1b revenue visibility over 5 years.
With strong deal wins in the Direct channel, and the hive-off of the domestic
BPO business, we estimate MPHL to stem the decline in revenues and post
growth at a CAGR of 7.2% over FY16-18E. Revenue growth confidence would be
the single most important factor for a re-rating. However, with uneven growth
seen in Digital Risk since its acquisition, consistency yet seems to be lacking.
While valuations at 12.4x/11.1x FY17E/18E are much discounted to peers
(particularly after factoring the Cash Balance), the rate of decline within HP
channel remains a risk.
Although it has guided for EBIT margin of 13-15% for now, the modalities of the
MSA with HPE remain unknown, posing potential risk to the margins. While
sustained momentum in the Direct channel business is a plus, any pricing
implications of the MSA with HPE will wipe out the visibility in the channel for
the company.
Impressive execution in Direct International business lends visibility of above-
industry growth in 2/3rd of MPHL’s business. Our current target price of INR540
discounts forward operating PAT by 11x, added to expected net cash of
INR120/share (compared to current cash of INR112/share). While Blackstone’s
buyout of HPE stake looks positive on the balance, we will revisit our Neutral
rating following clarity on the deal with HP and / or any visibility in the Digital
Risk business.
Momentum gain in Direct International channel
Pick up in quarterly deals TCV
Continued volatility in Direct Channel emerging markets
Failure to grow Direct International channel faster than industry growth
Volatility in Digital Risk
Exhibit 4: MPHL 1-year forward PB chart
Min(x)
48.2
12.0
8.0
PB (x)
Peak(x)
Avg(x)
9.8
Min(x)
Avg(x)
Key Triggers
Key risks
Exhibit 3: MPHL 1-year forward PE chart
53
41
29
17
5
6.4
15.6
14.8
PE (x)
Peak(x)
4.0
0.0
1.5
3.5
1.8
Source: Company, MOSL
Source: Company, MOSL
4 April 2016
3

Mphasis
Story in charts
Exhibit 5: HP Revenues have been declining rapidly…
HP Revenues
-5.9
-13.8
-17.0
-19.9
777
FY10
731
FY11
586
FY12
-22.4
455
FY13
157
5MFY14
325
FY15
34.1
FY11
43.5
FY12
55.6
FY13
63.2
65.5
65.9
56.5
44.4
36.8
34.5
% Change
Exhibit 6: … Now compounded with volatility in digital risk
Direct Channel (%)
HP Channel (%)
5MFY14
FY15
5MFY14* comparison normalized to be comparable
Exhibit 7: India revenue reduced further after sale of BPO
operations
India Revenue
7.0
18.6 19.8
1,229
-19.5
1,728
989
-28.9
925
1,097
-6.5
876
3.4
-10.4
% Change
21.4
-1.1 -0.5 1.7
Exhibit 8: … and portfolio issues have dragged EPS lower
year after year
EPS
12.5
-0.1
-4.8
-19.0
43.2
48.6
39.4
37.5
35.3
14.7
32.3
-5.8
-8.6
% Change
-24.3
1,462
1,480
1,218
1,359
1,479
1,455
1,120
5MFY14* comparison normalized to be comparable
Exhibit 9: 13-15% target EBIT margin band
EBIT Margin (%)
4.6
5.4
5.2
6.1
6.2
S&M (%)
6.3
6.2
6.0
Exhibit 10: Digital Risk revenues have rebound sharply;
outlook bleak again
Digital Risk Rev. (USD m)
34.2
42.5 46.3 45.5
29.6
38.0 34.0
22.4
30.8
38.0 40.8 39.9
4.2
4.4
21.7 20.6 16.4 16.4 15.3 15.2 13.3 13.3 13.9 14.2
Source: Company, MOSL
4 April 2016
4

Mphasis
Exhibit 11: Operating metrics
Operating metrics
Vertical Contribution (%)
Banking and Capital Markets
Insurance
IT, Commn & Entmt
Emerging Industries
Total
Revenue by Delivery Location (%)
Onsite
Offshore
Secondary Market Segment (%)
HP Channel
Mature Market - Direct Channel
Emerging Market - Direct Channel
Service Type (%)
App Maintenance
App Development
Customer Service
Service/Technical Help Desk
Trasaction Processing Service
Infra Management Services
Knowledge Processes
License Income
CLIENT METRICS
Client wins
BCM
Insurance
ITCE
Emerging industries
Total
Client wins Channels
Direct Channel
HP Channel
Total Client additions
Clients Contributing More than
USD1m
USD5m
USD10m
USD20m
Clients - Direct Channel
USD1m
USD5m
USD10m
USD20m
Clients - HP Channel
USD1m
USD5m
USD10m
USD20m
66
23
12
3
64
24
10
3
58
21
9
3
56
21
8
4
55
18
6
3
53
17
5
3
52
16
5
3
51
17
12
2
45
14
5
2
40
12
5
2
39
12
4
2
39
10
4
2
62
19
10
6
58
20
12
7
59
20
12
8
54
21
12
7
57
25
13
8
57
25
12
7
52
25
12
7
49
25
12
6
57
25
14
7
58
24
15
6
61
27
15
5
63
25
14
6
128
42
22
9
122
44
22
10
117
41
21
11
110
42
20
11
112
43
19
11
110
42
17
10
104
41
17
10
100
42
17
8
102
39
19
9
98
36
20
8
100
39
19
7
102
35
18
8
10
11
21
10
6
16
8
9
17
10
1
11
4
4
8
11
5
16
5
5
10
3
0
3
8
4
12
10
0
10
7
1
8
5
3
8
6
3
4
8
21
4
1
3
8
16
3
4
1
9
17
2
3
0
6
11
2
0
2
4
8
9
1
1
5
16
1
0
2
7
10
2
0
0
1
3
4
1
2
5
12
5
2
0
3
10
5
0
0
3
8
5
2
0
1
8
Apr-13
35.9
11.6
21.0
31.5
100
42
58
46
47
7
31
21
5
3
5
20
14
1
Jul-13 Oct-13 Jan-14 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15
39.7
11.5
17.8
31.0
100
45
55
41
54
5
31
22
5
3
5
17
17
0
41.8
12.1
16.2
29.9
100
47
53
40
56
4
31
22
5
3
5
16
18
1
41.4
12.9
16.1
29.7
100
47
53
37
57
5
29
20
5
3
5
18
18
1
41.5
12.1
16.3
30.1
100
46
54
36
57
7
26
23
5
3
5
19
18
0
40.7
12.8
16.8
29.7
100
45
55
36
56
8
28
22
5
3
5
20
16
0
41.9
13.4
16.9
27.8
100
46
54
36
58
7
29
24
6
3
6
18
15
0
39.6
14.9
16.9
28.6
100
43
57
35
56
9
29
25
6
2
7
20
11
1
41.8
15.3
15.6
27.3
100
47
53
31
60
9
29
25
6
2
7
17
14
1
44.3
15.5
14.3
25.8
100
49
51
29
64
7
29
25
5
2
7
15
17
1
46.9
15.2
12.7
25.2
100
49
51
27
67
7
30
24
4
2
7
15
18
0
49.7
15.7
10.0
24.6
100
51
49
24
70
5
33
23
2
2
7
15
18
1
4 April 2016
5

Mphasis
Financials and Valuations
Key assumption
2011
INR/USD Rate
Revenues (USD m)
Total Delivery Headcount
Net Addition
Per Capita Productivity (USD)
HP Channel Revenue (%)
Direct Channel Revenue (%)
45.7
1,117
40,408
446
27,646
65.9
34.1
2011
50,980
1.2
9,934
19.5
1,550
8,384
1,751
0
10,135
1,827
18.0
0
8,308
8,308
-19.1
2012
53.0
1,036
36,640
-3,768
28,284
56.5
43.5
2012
53,574
5.1
10,511
19.6
1,745
8,766
1,513
0
10,279
2,357
22.9
0
7,922
7,922
-4.6
2013
57.5
1,025
37,052
412
27,655
44.4
55.6
2013
57,963
8.2
10,335
17.8
1,446
8,889
1,062
0
9,951
2,514
25.3
0
7,437
7,437
-6.1
2014
58.7
427
35,663
-1,389
28,717
36.8
63.2
2014
25,939
7.4
4,397
17.0
504
3,893
389
0
4,282
1,191
27.8
0
3,091
3,091
-0.3
2015
61.3
944
34,059
-1,604
27,716
34.5
65.5
2015
57,949
-6.9
8,701
15.0
980
7,721
1,687
0
9,408
2,630
28.0
0
6,778
6,778
-8.6
2016E
65.7
928
22,062
-11,997
42,049
27.6
72.4
2016E
61,140
5.5
8,949
14.6
801
8,148
1,726
0
9,875
2,694
27.3
0
7,181
7,181
5.9
Source: MOSL, Company
2017E
67.0
948
23,362
1,300
40,594
23.4
76.6
2017E
63,515
3.9
9,747
15.3
929
8,819
1,776
0
10,594
2,913
27.5
0
7,681
7,681
7.0
2018E
69.0
1,066
26,087
2,725
40,876
19.9
80.1
2018E
73,148
15.2
11,440
15.6
1,075
10,365
1,448
0
11,813
3,249
27.5
0
8,564
8,564
11.5
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
(INR Million)
Balance Sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2011
2,100
36,898
38,998
2,946
-975
40,969
11,339
8,495
2,844
102
17,765
25,610
0
13,072
2,897
9,641
14,050
9,098
4,952
11,560
40,969
2012
2,101
41,946
44,047
3,299
-1,015
46,331
11,401
9,041
2,360
150
25,192
22,970
0
12,102
4,216
6,652
13,953
8,765
5,188
9,017
46,331
2013
2,101
47,243
49,344
5,600
-1,015
53,929
10,892
8,770
2,122
266
18,995
26,060
0
12,582
5,943
7,535
16,013
10,167
5,846
10,047
53,929
2014
2,101
49,049
51,150
5,555
-968
55,737
10,912
8,734
2,178
62
18,154
26,522
0
12,967
4,700
8,855
13,044
9,446
3,598
13,478
55,737
2015
2,101
52,697
54,798
6,253
-826
60,225
10,055
8,499
1,556
318
14,431
35,014
0
11,371
13,311
10,332
12,875
7,145
5,730
22,139
60,225
2016E
2,102
56,049
58,151
3,913
-757
61,307
10,027
8,520
1,507
849
18,006
33,672
0
12,377
10,823
10,472
15,660
9,071
6,589
18,012
61,307
(INR Million)
2017E
2,102
58,434
60,536
2,913
-757
62,692
12,147
9,449
2,698
849
18,006
29,959
0
13,106
6,381
10,472
11,754
9,605
2,149
18,205
62,692
2018E
2,102
61,197
63,299
1,913
-757
64,455
14,267
10,524
3,743
849
18,006
32,962
0
15,190
7,301
10,472
14,038
11,132
2,906
18,924
64,455
4 April 2016
6

Mphasis
Financials and Valuations
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
90
0
0
0.0
86
0
0
0.0
78
0
0
0.0
74
0
0
0.0
77
0
0
0.0
71
0
0
0.0
73
0
0
0.0
71
0
0
23.1
22.2
19.1
19.6
15.9
17.4
14.8
16.7
12.8
13.1
12.7
13.2
12.9
14.1
13.8
16.1
12.9
11.1
1.9
1.3
7.4
3.7
14.1
12.3
1.7
1.3
8.5
3.5
13.3
12.0
1.6
1.2
7.9
4.1
12.4
11.1
1.6
1.2
7.6
4.6
11.1
9.9
1.5
1.0
6.3
5.1
39.3
46.9
185.7
6.5
16.5
37.5
46.0
209.6
17.0
45.3
35.3
42.3
234.9
17.0
48.1
14.7
17.1
243.5
7.0
47.6
32.3
36.9
260.8
16.0
49.6
34.2
38.0
276.6
18.8
54.9
36.5
41.0
288.0
21.0
57.5
40.7
45.9
301.1
23.0
56.4
2011
2012
2013
2014
2015
2016E
2017E
2018E
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2011
9,934
1,751
1,247
-1,827
-221
10,884
-1,985
8,899
-3,165
-4,812
-9,961
-704
2,490
0
-1,598
188
1,111
1,786
2,897
2012
10,511
1,513
3,862
-2,357
-40
13,489
-1,309
12,180
-7,427
-914
-9,650
1,307
353
0
-4,180
-2,520
1,319
2,897
4,216
2013
10,335
1,062
697
-2,514
0
9,580
-1,324
8,256
6,197
-12,887
-8,014
2,040
2,301
0
-4,180
161
1,727
4,216
5,943
2014
4,397
389
-4,674
-1,191
47
-1,032
-356
-1,388
841
634
1,119
436
-45
0
-1,721
-1,330
-1,243
5,943
4,700
2015
8,701
1,687
-50
-2,630
142
7,850
-614
7,236
3,723
84
3,193
903
698
0
-4,033
-2,432
8,611
4,700
13,311
2016E
8,949
1,726
1,639
-2,694
69
9,690
-1,283
8,407
-3,575
-1,152
-6,010
901
-2,340
0
-4,730
-6,169
-2,489
13,310
10,822
2017E
9,747
1,776
-4,635
-2,913
0
3,975
-2,120
1,855
0
0
-2,120
0
-1,000
0
-5,297
-6,297
-4,442
10,822
6,379
(INR Million)
2018E
11,440
1,448
200
-3,249
0
9,840
-2,120
7,720
0
0
-2,120
0
-1,000
0
-5,801
-6,801
918
6,379
7,298
4 April 2016
7

MPHASIS GALLERY
MPHASIS
OTHER COMPANIES
SECTOR UPDATES

Mphasis
NOTES
4 April 2016
9

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