The Morning Meeting Notes as on 25th February, 2010.
Contents
n Research Views
Mphasis Jan'10 Results: Much feared pricing cut happens, forex gains lead to quarterly profit beat
Jan'10 Results Highlights;
Revenues at Rs 11.9 bn(+5.2% QoQ) beat expectations ( Emkay expectations at Rs 11.73 bn) marginally however driven by significantly higher than expected hedging gains of Rs 357 mn during the quarter ( our expectation of ~Rs 150 mn). Reported operating profits at Rs 3136 mn(+6.5% QoQ) were in line with est with margins expanding by ~30 bps sequentially to 26.3% (V/s our expectations of ~60 bps increase). SG&A expenses declined by ~170 bps QoQ to 8.3%, lowest ever in co's reported history thus aiding overall co wide margins. Profits at Rs 2.7 bn (+9.5% QoQ) were boosted by forex gains of Rs 240 mn.
Much feared price cut from the parent emerges
Over the past few quarters, we (including some other street participants) have been concerned by the increasing probability of a pricing cut from the parent, given the ever increasing contribution of business from HP/EDS. Albeit company has continued to deny any price cut fears from the parent until now.However in the current quarter reported ITO offshore rate has decreased substantially to US$ 18/hr ( V/s US$ 22/hr until now). Similarly the slide in average BPO pricing continued with reported bill rates down to US$ 7/hr during Jan'10 quarter ( V/s US$/10 hr until April'09 quarter). We would be looking to seek co's comments on (1) pricing outlook from the HP/EDS side given the high dependence of revenues from the parent , (2) any possibilites of a similar cut being imposed on the application services side as well ( our rough cut calculations suggest ~60% of Applications revenues driven by the HP/EDS channel)
Current operating margins may be unsustainable going forward
Mphasis's operating margins have expanded by ~1000 bps over the past 8 quarters to 26%+ driven primarily by currency depreciation benefits (every 1% INR depreciation impacts Mphasis's operating margins by ~60 bps as compared to ~35-40 bps for Tier 1 peers) and SG&A effeciencies/
cuts. Per our calculations, Mphasis's margins have already been hit by ~450 bps over the past 3 quarters( refer calculation below). We believe Mphasis's current margins could be further threatened in case of a (1)further US$/INR appreciation and (2) full impact of pricing cuts from HP/EDS Expect stock to undo the recent outperformance
Mphasis's stock is up by ~15% over the past 3 weeks as street expected strong Jan'10 numbers . Given that the boost in financials has come in primarily from forex hedging gains as well as the with the much feared price cut from HP now a reality , stock could undo the recent outperformance. We continue to believe that valuations for Mphasis at ~15x Oct'10E earnings of ~Rs 50/~14x Oct'11E earnings of Rs 53.8 ( estimates under review , might be tweaked marginally post investor concall tomorrow) are full. (for further details also refer to our Mphasis:Downgrade one notch to HOLD citing full valuations dated 20 Nov'09)
We currently have a HOLD rating on the stock with a price target of Rs 650.
Range bound session:
After trading in a very narrow range, finally Nifty ended the day almost on a flattish note. Both inverse H & S and symmetric triangle are still on the cards and yet to see a breakout. Hourly momentum cycle is virtually flat and signal-less and just resting on the neutral line. On downside 4805 is a good support and on upside 4912 is a good resistance to watch out for.
BSE Realty:
Buying was witnessed in the BSE Realty index and recovered some of its losses and finally closed at 3192 with a marginal gain of 0.93%.Going forward now this index has resistance at 3242 and 3286 which are 38.20% and 50% retracement level of the recent fall from 3471 to 3100. However as on the daily chart this index is still making lower tops and lower bottom, thus we maintain our downside target of 2965 and we believe that any ongoing bounce back should be used as an exit opportunity.
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Regards,
Emkay Research
Emkay Global Financial Services Ltd.
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