"Mphasis, due to shutdowns and reduced exposure from government contracts, Q1FY13 is likely to witness decline of ~2.5% QoQ in direct channel. Moreover, HPC channel will decline by ~3.5% QoQ due to shutdown. The operating margin is likely to be soft due to shutdowns and furloughs. Three reasons why we expect business momentum to improve: 1) HP business likely to stabilize after Q2FY13 decline of ~5% QoQ. The management expects stable revenue from HP in H2FY13. 2) Business momentum from Direct Channel likely to pick-up from Q2FY13 (expects ~2.5% QoQ growth). 3) Operating margin could improve by flattening the pyramid (0-3 years: ~18% in Applications).
Mphasis has identified five key accounts, wherein, they want to grow their wallet share. According to the management, the company is implementing recommendations given by BCG to gain increased revenue momentum. The management expects integration in mid- Feb as 90% approvals have been received from states (initially 46 states licenses). The business is likely to contribute revenue of US$150m/year (Paid: US$175m) with EBIT margin of 10%. However, the earn-out (US$27m) is linked to improvement of EBIT margin to 15% in 3 years. It will be EPS neutral in FY13.
The business seems likely to be troughed out in H1FY13. We expect momentum to get better in H2FY13. We upgrade Mphasis to 'Accumulate', with revised target price of Rs 420, 10x FY14 earnings estimate," says Prabhudas Lilladher research report.
Non-Institutions holding more than 90% in Indian cos
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