Mphatic Growth - MphasiS

Very few companies have the ability to grow consistently even in adversities. However, despite their efforts such scrips fail to catch investors’ fancy. But, it is only about time that these scrips would catch up with the valuations. MphasiS is one such scrip. It formed a part of our recommendations at price of Rs 667.20 in our Muhurat Buy Cover Story in October 2009. The scrip did go up post-recommendation, but now is yet again available at CMP of Rs 683 and it makes sense to accumulate it again.

MphasiS is one of the leading software services companies and operating in applications services, Infrastructure Technology Outsourcing (ITO) and BPO segments, which contribute 68 per cent , 17 per cent and 15 per cent to total revenues respectively. US and Europe together account for 87 per cent of MphasiS’ revenues, while balance 13 per cent comes from Asia.

There are reasons why we feel MphasiS makes sense even now. MphasiS is one of the few companies that has not only weathered the global slowdown, but continued to grow at a brisk pace. It should be noted that despite global adversities MphasiS has still managed to grow at three year CAGR of 84.97 and 127.22 per cent in revenues and profits. While it ended last fiscal on a strong note, it has started the new fiscal (fiscal year ends in October) on a positive note with topline and bottomline growth of 22 per cent and 28 per cent respectively in the first quarter ended January 2010.

Besides, MphasiS is in a sweet spot and would not only benefit from the improving IT scenario, but also from the strong HP parentage. MphasiS is a HP company with Hewlett Packard (HP) acquiring EDS in May 2008, it resulted in Mphasis becoming a subsidiary of HP. HP currently accounts for 71 per cent  of MphasiS total revenues. With HP focus more on offshoring, MphasiS’ proven capabilities and MphasiS’ joint ‘Go-to-the market’ initiative with HP, MphasiS is bound to witness strong growth in the coming years. In fact, according to reports, HP-EDS together is the world’s second-largest IT company. This indicates the immense growth opportunities for MphasiS in the coming years. That apart, IT scenario has considerably improved from what it was two years back and new and bigger deals have started to flow in from last couple of quarters. This augurs well for MphasiS as it could help it push the non-HP business, which accounts for 29 per cent of total revenues.

For Q1FY10, consolidated revenue increased 22 per cent to Rs 1191.6 crore (Rs 977.7 crore), while profits increased 28 per cent to Rs 268.3 crore (Rs 210.0 crore). Finally, what makes MphasiS more attractive is its low valuations. On trailing twelve-month profits, MphasiS generates an EPS of Rs 46.13, thereby resulting into PE of 14.6x, which seems very attractive when compared to IT biggies such as Infosys’ 26x, TCS at 27x and Wipro at 20x. Besides, considering the underperformance of MphasiS to broader markets, it’s only about time it will catch up with the valuations. Hence one can buy MphasiS with one-year target of Rs 814.