Kotak: Risk to Mphasis’ profitability is higher than peers

Mphasis reported another weak revenue performance. Revenues declined 1% y-o-y and were flat on sequential basis. EBIT margin decreased 60 bps partly due to wage hikes.

Written by Kotak

February 4, 2017 03:00 IST

In a recent note to investors, Kotak Institutional Equities said Mphasis’ valuation is not pricing in the risks. (Reuters)

Mphasis reported another weak revenue performance. Revenues declined 1% y-o-y and were flat on sequential basis. EBIT margin decreased 60 bps partly due to wage hikes. Growth underperformance will continue with 40% of revenue unlikely to grow (HP + Digital Risk) and balance 60% growing in line with the industry.

Risk to profitability is higher than peers in view of legacy portfolio and underinvestment in digital.Use the buyback-induced strength in stock price to exit.

On y-o-y comparison, EBIT margin has increased by 120 bps. Net profit of Rs 2.04 billion was 4.4% ahead of our estimate with the outperformance on account of Fx gains of Rs 101 million. Mphasis has announced buyback of 17.37 million shares (8.3% of the outstanding equity) at a maximum price of Rs 635 through the tender route. Blackstone owns 60.41% of the company and will participate in the offer. Total outlay for the buyback is Rs 11.03 billion and represents 34% of the net cash balance.

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Mphasis announced appointment of Nitin Rakesh as CEO. The new CEO will articulate growth strategy in the due course. Near-term outlook: HP: Mphasis expects flat/moderate growth in revenues in the near to medium term, direct international core. Deal wins worth $96 million TCV in Q3 and $275 million in 9MFY17 (20% y-o-y) would drive steady growth, and Digital Risk: Weak outlook in view of rising interest rates in US (adversely affects Digital Risk); expect the decline to continue.

This article was first uploaded on February four, twenty seventeen, at zero minutes past three in the night.