Kotak: Risk to Mphasis’ profitability is higher than peers

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Published: February 4, 2017 3:00:29 AM

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.

Mphasis announced appointment of Nitin Rakesh as CEO. The new CEO will articulate growth strategy in the due course. (Reuters)Mphasis announced appointment of Nitin Rakesh as CEO. The new CEO will articulate growth strategy in the due course. (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.

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