Mphasis' 4QFY16 revenues of USD225mn declined 1.5% QoQ, below consensus estimate of 0.7% QoQ decline. HP business (HP) saw a marginal decline of 1.1% QoQ in USD terms, lowest in last several quarters. HP revenues are expected to stabilise by 2QFY17 and the company doesn't anticipate the decline in FY17 to be similar to 21% levels seen in last few years. This we believe is a key positive given the HP decline was a prime overhang on the revenue and stock performance. Direct International (DI) segment had a marginal decline of 0.3% QoQ which was expected given the softness in Digital risk business. The management did allude that DI will continue to grow ahead of industry in FY17 as well; riding the deal wins (USD303m in FY16 versus USD165m in FY15), healthy pipeline and continued focus to win new logos and increasing wallet share in existing clients. The company also booked exceptional loss of INR316m towards expected loss on long term contract, this is likely to add 60-70bps to EBIT margin from 1QFY17 onwards, hence the company expects EBIT margin to be in the range 14-16% (13-15% earlier) in 1HFY17.
The management's focus on scaling up DI is yielding returns reflected from higher deal wins and ~14% USD revenue growth in DI in FY16. With signs of HP business stabilising and improved profitability, we revise our USD revenue growth estimate marginally to 2% from 1% earlier for FY17 leading to 3%/2% upward revision in our FY17FY18 EPS estimate. Given the improved fundamentals and reduced overhang from HP, the stock warrants a higher valuation than our current 11x and hence we revise our target multiple to 13x. We maintain our Hold recommendation with a target price of INR540 (13x FY18e EPS). Direct international takes a breather; HP business signs of bottoming out DI on expected lines was soft and declined 0.3% QoQ in USD terms while HP saw a decline of 1.1% QoQ lowest in past several quarters. EBIT margin at 14.3% saw 110bps QoQ expansion in line with estimates. Deal wins continue to remain strong and in the company's focus areas of digital, global risk and compliance (GRC) and IMS. On the dividend front the company mentioned, Blackstone intends to propose a special dividend post the open offer. The open offer process is expected to be completed by July, 2016. HP business - light at the end of the tunnel HP’s sequential decline in USD terms was lowest quarterly decline in past ~4 years. The company envisages stability in the HP account from 2QFY17 onwards and does not anticipate decline in FY17 to be as severe as seen in last few years (~21% YoY decline). Stability in the HP business is long awaited and will be a key driver of valuation re-rating hereon. The company does not anticipate the recent announcement of HP Enterprise (HPE) merging its services business with CSC having an impact on the revenue committed by HPE. We believe the merged entity with revenues of USD26bn and 5000 clients provides an interesting opportunity for Mphasis to drive revenue growth, given that it is well entrenched in HPE and can leverage this relationship to broader set of clients, across the combined entity. However, the caveat here is the softness in HP revenues during the transition phase, when HPE and CSC are integrating their businesses. Outlook & Valuation With the concerns on the HP segment waning and DI continuing its strong show, the stock is bound for a re-rating and hence we revise up our target P/E multiple to 13x from 11x earlier. The stock currently trades at 11.8x FY18e EPS and we maintain our Hold recommendation with a target price of INR540 (13x FY18e EPS -- Kindly email stock reports at STOCKRESEARCHER@googlegroups.com For sharing knowledge -- NIFTYVIEWS.COM NOW A FREE OPEN SOURCE WEBSITE. http://www.niftyviews.com/ Disclaimer :- "The opinions expressed by the members on this board are based on their individual experience and perceptions and to share information with other members with the best of intentions to help fellow members in investment decisions as equity investment is a risky venture.The administrator of www.Niftyviews.com just provide a platform for the authors to express their opinion and take no guarantee for the genuineness of the same."ANY member of this forum doesnt prepare or publish any research report; or ii. provide research report; or iii. make 'buy/sell/hold' recommendation; or iv. give price target; --- You received this message because you are subscribed to the Google Groups "Niftyviews.com" group. To unsubscribe from this group and stop receiving emails from it, send an email to stockresearcher+unsubscr...@googlegroups.com. For more options, visit https://groups.google.com/d/optout.
