Retain reduce on Mphasis as HP revenue slide continues

By: |
June 20, 2015 12:37 AM

Mphasis attributed this growth recovery to initiatives such as (1) creation of separate client mining and hunting teams, (2) onsite relocation of delivery heads of its six key accounts, and (3) decentralisation of decision making.

Mphasis management reiterated that its direct channel revenues (non-HP business) would grow in line with Nasscom’s industry growth guidance of 12-14% for FY16. This confidence emerges from the healthy pipeline and deals won worth ~$270 million in FY15. The management expects the direct channel organic as well as Digital Risk to contribute to growth.

Mphasis attributed this growth recovery to initiatives such as (1) creation of separate client mining and hunting teams, (2) onsite relocation of delivery heads of its six key accounts, and (3) decentralisation of decision making.

Additionally, it has also taken corrective measures in its  Digital Risk business. Mphasis management expects direct channel revenues to grow faster than the market in the medium term and expects the Ebit margin to be in the range of 14-16% in the medium term (versus 13.3% in FY15).

The HP channel, which accounts for about 30% of Mphasis’ revenues, continues to decline about 20% annually, led by two factors (1) HP losing contracts globally and (2) HP shifting work  from Mphasis to its 100% India subsidiary.

The management has no visibility on stabilisation of the HP business. Recovery of growth in non-HP business is encouraging, but the continued decline in HP revenues would be a drag on overall growth and doesn’t support further re-rating. We retain Reduce rating with a target price of R375.

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