Mphasis volume growth continued to be strong in Applications (16%) and ITO (15%) businesses. Hedging gains and inorganic measures also helped revenues grow. However, in line with concerns expressed by us in the previous quarter, the ITO business experienced significant billing rate pressures from HP.
Applications business may also witness pressure over the next two quarters and will be an overhang on the stock, we believe. BPO revenues were lower q-o-q as HP scaled down business. EBIDTA margins were higher due to a significant reduction in G&A expenses which, we believe, could be temporary. HP’s support continues to lead to significant client and business acquisition with 11 new accounts in 1QFY10. FY10E earnings stand revised at Rs.49.2 per share.
We retain our optimism on Mphasis’ future prospects on expectations of a sustained volume growth. However, uncertainty on growth in some part of HP revenues (BPO) and billing rates pressures may keep stock subdued in near term.
Recommend using any such corrections to ACCUMULATE the stock. Price target stands at Rs.706 (Rs.672), after according a sizeable discount to larger peers. A delayed recovery in user economies and a sharper-than-expected rupee appreciation are key risks to our estimates and recommendation.
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