MphasiS Displays An Impressive Performance

MphasiS announced its Q3 numbers post market hours on August 29, 2013. Its performance in terms of revenues and at an operational level has been robust. Shares of MphasiS touched an intraday high of 6.42% at Rs 447 per share earlier today.

Revenue Growth

In Q3, revenues of MphasiS grew by 8.90% to Rs 1569.26 crore. While the company’s revenues from its HP business declined by 0.7%, it saw strong growth in its direct business. MphasiS has been working on mitigating the risk of client concentration by increasing the share of its direct business in total revenues. In Q3 2013, the company’s direct business contributed to 59% of total revenues as compared to 54% in the previous quarter.

Direct Business Versus HP Business

Revenue growth from MphasiS’ direct business grew by 18.3 in Q3. A large of chunk of this growth was on account of the traction seen in Digital Risk, an analysis firm that MphasiS acquired in December 2012, on account of the ramp up in a USD 102 million deal signed in the previous quarter. Organic growth in MphasiS’ direct revenues business came in at 12.9%.

Geographical Distribution

In the company’s direct business, while organic growth from mature markets stood at 20.6%, organic growth from emerging markets declined by 24%. This decline was on account of the exit of MphasiS from loss-making government contracts in India. Revenues from the Americas and EMEA grew by 13.67% and 7.83% respectively. Revenues from India declined by 19.53% and those from the rest of the world grew by 8.09%.

Service Revenues

All-round growth was seen in MphasiS, considering a revenue break in terms of services offered. The only segments to see a decline were Infrastructure Management Services (-3.67%) and License Income (-52.63%). However, since License Income accounts for less than 1% of the total revenues, its heavy decline didn’t make a significant impact on the overall financials of MphasiS.

Client Addition

During the quarter, it is clear that MphasiS saw robust revenue growth. At the same time, it saw stability in pricing across services, onsite and offshore. Its client wins were stable in the direct business as the company won 10 new clients. However, in Q3, it won 6 clients in the HP channel, against 11 client wins in Q2. This led to an increase in clients by 16 in Q3, while this number stood at 21 in the previous quarter.

Employee Metrics

In Q3, MphasiS saw a net addition of 149 employees, taking its total headcount to 38963. Its blended (onsite + offshore) utilisation levels (including trainees) remained healthy. They stood at 86%, 91% and 62% for Application Service, ITO Services and BPO Services respectively.

Operational Profitability

In the quarter, the company also underwent wage raises. Moreover, it saw an increase of 13.35% in selling expenses; mainly on account of investing in selling efforts and higher marketing spend. Despite the impact of these factors, the company’s operating profit grew by 17.70% to Rs 243.4 crore. This marks an expansion of 116 basis points in its operating profit margin to 15.51%. This marks an impressive performance on the operation level.

Bottomline Performance

Although there was an improvement in MphasiS at the operational level, the company’s net profit grew by 9.12% to Rs 192.64 crore, in Q3. This translates into a margin expansion of a mere 2 basis points to 12.28%. In Q3, its other income was lesser by 31.27% as the company had Rs 20.1 crore mark-to-market losses on account of reduction in the net realisable value of current investments. Moreover, the company’s effective tax rate expanded by 160 basis points to 26.7%. This resulted in a flattish trend in the bottomline of MphasiS.

Conclusion

Overall, the result of MphasiS was robust. Its strategy to mitigate risk and reduce the dependency of its business on HP has been showing. Moreover, growth has been strong in its direct business, fuelled by its acquisition and by traction seen in developed markets. The fact that it has improved profitability despite negative factors is also commendable. Moreover, its profitability outlook improves as the company is narrowing its accounts by hiving off loss-making contracts. We thus have a positive outlook on the performance of MphasiS.

Note:

1. MphasiS follows a November to October year, making the quarter, May to July 2013 its third quarter, which is referred to as Q3 hereon
   
2. Since MphasiS is an IT company, all comparisons are made on a sequential basis. Comparison of all metrics for the quarter May to July 2013 (Q3) are thus made with the quarter February to April 2013 (Q2)