SANJAY CHHABRIA's WEEKLY STOCK IDEA(S) -30th July 2007
Vol IV No 46
Please read the disclaimer at the end of this page.
"One of the ways that investing is a great business is that you can achieve very successful results even if you are mostly wrong about the market". - Seth Klarman
"When it's time to buy, you won't want to".- Walter Deemer
"The mass never comes up to the standard of its best member, but on the contrary degrades itself to a level with the lowest".- Henry David Thoreau
This Week's Stock Idea(s)- Mphasis Ltd(Rs 259)
Given the current market conditions, Investors would do well to accumulate gradually on declines.
Most IT companies have declared their results for the Q1FY08. The results for most of these have been Uninspiring in Rupee terms. The major reasons of spoilsport for most results this quarter have been the appreciating Rupee and, wage impacts. Last year the dollar depreciated by ~10% from Rs. 44 to Rs. 40 and ergo, the downward revision of earning guidance/expectatio
Mphasis Ltd(Rs 259)(BSE Code- 526299 NSE Code-MPHASIS)- Mphasis is a leading tier 2 vendor in BFSI segment and one of the Top 20 integrated software services vendors employing more than 17,500 people in both IT services as well as BPO services. EDS acquired 52% of Mphasis in June 2006 and has subsequently hiked their stake by merging its subsidiary EDS(India) with Mphasis, the increased stake now standing at 61.8%. In July 2006, Mphasis approved the merger of EDS India, a wholly-owned subsidiary of Electronic Data Systems Corporation (EDS), US, with itself. The swap ratio of the merger will be 5:4 (5 shares of Mphasis for every four shares of EDS India) and would entail the issue of 44,104,065 shares of the company. Though the legal merger happened this month(July 2007), operational integration is already over. Mphasis Ltd on July 24, 2007 announced that the Hon'ble High Court of Karnataka has approved the merger of EDS Electronic Data Systems India Pvt Ltd (EDS India) with the Company, with effect from April 01, 2006. With this the merger of the Company and EDS India is now complete. The combined entity has nearly 23,000 people on its rolls. The merger was approved by the shareholders of the Company in November 2006.
Consolidated revenue of Mphasis was 27% higher to Rs 1195.82 cr. in the year ended March 2007 over FY 2006 on a strong 30% growth in the IT services to Rs 836.11 cr., with a healthy expansion in the financial services business. On the other hand, the BPO business spurted 21% to Rs 359.71 crore with the increase primarily contributed by telecom clients in India. Net profit was down 20% to Rs 119.88 crore due to poor performance in the initial quarters ahead of the EDS merger talks. On a equity of 164 cr. the EPS stood at Rs 7.3 and the dividend declared was 30%. As per unaudited numbers, EDS India reported revenue of Rs 570 crore with net profit of Rs 59 crore in FY 2007. The in-house business from EDS Global is doubling, quarter-on-quarter. There was no business from EDS in Q1 June 2006 of FY 2007. In Q2 September 2006, it was US$ 2 million; Q3 December 2006 US$ 4 million; and in Q4 March 2007 US$ 9 million. The revenue from EDS Global will have a continuous momentum. The manpower strength including that of EDS India stood at 20,249 employees end March 2007. For calendar year (CY) 2007, Mphasis including EDS has planned to add 8,000-10,000 people. Currently, about 550 employees are doing EDS work.
The Mphasis management had earlier identified four growth drivers: growth in existing Mphasis business, shared services work from EDS, offshore engagements within the existing accounts of EDS, and joint pursuit of large deals. Most of these growth drivers have started kicking in: internal finance & accounting (F&A)- and human resources (HR)-shared services work (employee ramp-up in BPO space in March 2007) as well as a large deal won from a European telecom company by the Mphasis-EDS combine. The management has also indicated the possibility of another large-deal-win from a retail major in the near future. The combine is also pursuing many multi-million multi-year deals. Mphasis has charted a game plan to get enrolled with top 70 clients of EDS in the current year. EDS will continue to work with its other three vendors in India, namely, Wipro, Cognizant & WNS. The current focus would be to increase the scale and capabilities at Mphasis, before any change is contemplated on this front.
Mphasis is targeting to become a $ 1 billion revenue company by FY10 from currently at ~ $ 350 Mn, reflecting a desired growth CAGR of ~40%. This ambitious target does not seem to be unachievable, when one looks at the fact that there is a tremendous scope for outsourcing from the $19 billion EDS. India & Mphasis are clearly the biggest beneficiaries of the Best-Source strategy. Also similar feat has already been achieved by IBM when its revenues soared from just $350 Mn. In 2002 to over 1 billion in 2005. Including EDS India, the FY 2007 EPS of the merged entity works out to Rs 8.6, which is expected to rise to Rs 13 in FY 2008 on a expanded equity of 208 cr.. The share trades at Rs 259, giving a P/E of 20 times. With the EDS tag and expected earning growth of 50% for a couple of years, the scrip will outperform the market. Investors can accumulate the Mphasis stock at this level and add more on declines (in the range of Rs 225- Rs 255) for a price target of Rs 350-Rs 375 in the medium -long term.
Sanjay Chhabria is an equity analyst and investment consultant based at Raipur (Chhattisgarh)
Disclaimer- Sanjay Chhabria (Author), does not accept any liability arising from the use of this report. Under no circumstances does the information in this report represent a recommendation to buy or sell stocks. This report has been prepared solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Investors are advised to satisfy themselves before making any investments. Though all care is taken in preparing this report, subscribers are cautioned that prices of equity shares may rise or fall in a manner not foreseen. Subscribers and readers using the information contained herein are solely responsible for their actions and shall not hold the Author liable for any investment decisions/ actions based on the Content provided. Investment in stock market is risky and volatile
BigGains !!
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