Merrill Lynch has maintained buy rating on MphasiS BFL with the price objective of Rs 385, given a strong deal pipeline, increased offshoring and mix-led improvement in operating margins.
Strong 1Q results; Maintain Buy
We maintain our Buy on MphasiS with a PO of Rs 385, at a target P/E of 20x FY09E. This is justified, in our view, given strong FY07-09E earnings CAGR of 47%. We remain buyers given continued growth momentum (16% qoq volume growth), increasing visibility as reflected by the USD 1 billion order book, success in deal wins through joint pursuits with EDS, and improving margins.
1Q results: Margin decline lower than anticipated
EBIT margins declined marginally by 64bps to 12.7%, despite 7% appreciation in INR/USD. Margin impact of 340 bps due to rupee was largely mitigated by strong volume growth and pricing. We expect margins to expand by 150bps over the next 4-6 quarters, primarily driven by economies of scale.
Synergies with EDS playing out
Revenues from EDS increased to 40% during the quarter from 30% in 4Q FY07, indicating a strong thrust to offshoring from EDS. Visibility continues to improve, with the order book now exceeding USD 1 billion. With nearly ten new EDS relationships added and increasing wins through joint pursuits, management expects EDS share to increase further to 50% in the next 2-3 quarters.
Strong hiring; Buy with PO of Rs 385
MphasiS added 2058 employees and is in line with its earlier guidance of adding 8000-10,000 employees during the year. Key short term triggers include ramp-up from its three large deals in 3Q FY08 and possible resumption of guidance post 3Q FY08. We retain our Buy rating with a PO of Rs 385 at target P/E of 20x FY09E and PEG of 0.9 FY07PE to EPS CAGR (FY07-09E).
Strong 1Q results; Buy
MphasiS reported yet another strong set of quarterly numbers with 6% qoq growth in revenues and lower than expected decline in profits. We retain our Buy rating at a target PE of 20x FY09E with PO of Rs 385, given a strong deal pipeline, increased offshoring and mix-led improvement in operating margins.
Higher volumes, masked by appreciating rupee
USD revenues grew by 14% qoq, primarily driven by 16% qoq growth in volumes, the highest amongst mid-cap companies. While ITO and IT services grew by 6- 8% qoq, BPO revenues were flat in rupee terms despite strong dollar growth.
EBIT Margins: decline lower than anticipated
EBIT margins declined by 64bps to 12.7% and were largely impacted by the appreciating rupee. Rupee impacted margins by 340bps during the quarter. Excluding rupee, EBIT margins would have been higher by at least 300bps. Management expects margins to be maintained at 13-14% for FY08.
Strong hiring continues, robust outlook
It recruited 2058 employees during the quarter, an addition of 10% to its workforce and in line with its stated target of recruiting 8000-10,000 for the full year. It currently has 400-seat training capacity at Mysore and intends to expand capacity to 1000 over next 6-9 months. Management indicated that pipeline remains robust and it has sold order book of USD 1 billion, to be implemented over next 6-7 years.
Hedging concerns addressed
While it adopted balance sheet hedge which is followed by EDS, management on the call indicated that it would implement a cash flow hedge indicating a change in hedging policy. Lack of hedging and its impact remained one of the key short term concerns, which has been addressed during the quarter. Currently it has hedge of around USD 35 million, which is likely to be increased during the current quarter, post adoption of the cash flow hedge.
Multiple triggers in short term
3Q to reflect large deal flows
MphasiS during the last two quarters has won at least three large deals (Vodafone, World Bank and KarstadtQuelles) through joint pursuits with EDS. Management indicated that while revenues from these deals have started, it is likely to follow a J curve pattern. We believe revenue flows could start as early as 3QFY08, implying strong sequential growth rates ahead.
Guidance policy to be resumed
Management also intends to revisit its guidance policy and is most likely to start issuing guidance from 3Q.
Strong 1Q results; Maintain Buy
We maintain our Buy on MphasiS with a PO of Rs 385, at a target P/E of 20x FY09E. This is justified, in our view, given strong FY07-09E earnings CAGR of 47%. We remain buyers given continued growth momentum (16% qoq volume growth), increasing visibility as reflected by the USD 1 billion order book, success in deal wins through joint pursuits with EDS, and improving margins.
1Q results: Margin decline lower than anticipated
EBIT margins declined marginally by 64bps to 12.7%, despite 7% appreciation in INR/USD. Margin impact of 340 bps due to rupee was largely mitigated by strong volume growth and pricing. We expect margins to expand by 150bps over the next 4-6 quarters, primarily driven by economies of scale.
Synergies with EDS playing out
Revenues from EDS increased to 40% during the quarter from 30% in 4Q FY07, indicating a strong thrust to offshoring from EDS. Visibility continues to improve, with the order book now exceeding USD 1 billion. With nearly ten new EDS relationships added and increasing wins through joint pursuits, management expects EDS share to increase further to 50% in the next 2-3 quarters.
Strong hiring; Buy with PO of Rs 385
MphasiS added 2058 employees and is in line with its earlier guidance of adding 8000-10,000 employees during the year. Key short term triggers include ramp-up from its three large deals in 3Q FY08 and possible resumption of guidance post 3Q FY08. We retain our Buy rating with a PO of Rs 385 at target P/E of 20x FY09E and PEG of 0.9 FY07PE to EPS CAGR (FY07-09E).
Strong 1Q results; Buy
MphasiS reported yet another strong set of quarterly numbers with 6% qoq growth in revenues and lower than expected decline in profits. We retain our Buy rating at a target PE of 20x FY09E with PO of Rs 385, given a strong deal pipeline, increased offshoring and mix-led improvement in operating margins.
Higher volumes, masked by appreciating rupee
USD revenues grew by 14% qoq, primarily driven by 16% qoq growth in volumes, the highest amongst mid-cap companies. While ITO and IT services grew by 6- 8% qoq, BPO revenues were flat in rupee terms despite strong dollar growth.
EBIT Margins: decline lower than anticipated
EBIT margins declined by 64bps to 12.7% and were largely impacted by the appreciating rupee. Rupee impacted margins by 340bps during the quarter. Excluding rupee, EBIT margins would have been higher by at least 300bps. Management expects margins to be maintained at 13-14% for FY08.
Strong hiring continues, robust outlook
It recruited 2058 employees during the quarter, an addition of 10% to its workforce and in line with its stated target of recruiting 8000-10,000 for the full year. It currently has 400-seat training capacity at Mysore and intends to expand capacity to 1000 over next 6-9 months. Management indicated that pipeline remains robust and it has sold order book of USD 1 billion, to be implemented over next 6-7 years.
Hedging concerns addressed
While it adopted balance sheet hedge which is followed by EDS, management on the call indicated that it would implement a cash flow hedge indicating a change in hedging policy. Lack of hedging and its impact remained one of the key short term concerns, which has been addressed during the quarter. Currently it has hedge of around USD 35 million, which is likely to be increased during the current quarter, post adoption of the cash flow hedge.
Multiple triggers in short term
3Q to reflect large deal flows
MphasiS during the last two quarters has won at least three large deals (Vodafone, World Bank and KarstadtQuelles) through joint pursuits with EDS. Management indicated that while revenues from these deals have started, it is likely to follow a J curve pattern. We believe revenue flows could start as early as 3QFY08, implying strong sequential growth rates ahead.
Guidance policy to be resumed
Management also intends to revisit its guidance policy and is most likely to start issuing guidance from 3Q.
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