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Equity Research Report On

Mphasis Limited

For Institutional Clients

Analyst:
ANKIT KHAITAN
akhaitan@hemonline.com
 www.hemonline.com

BROKING | DEPOSITORY | DISTRIBUTION | FINANCIAL ADVISORY

Mphasis Limited th
19 March 2009

th
Market Cap: 52 Week Range: Price as of 19 March: Beta: Target Price:
4,025.81 Crores 256.00 / 119.40 193.10 0.73 238.00
Outstanding Shares: Avg. Volume Traded: BSE Code: NSE Code:
BUY Upside:
20.84 Crores INR 2.91 Crores- 30 Days 526299 MPHASIS 45.00

MPHASIS LIMITED BUSINESS DISCRIPTION

Mphasis Limited is an IT company which offers
Application Services, Business Process Outsourc-
ing Services and Infrastructure Technology Out-
sourcing Services. The company offers solutions
to industries such as banking and financial ser-
vices, logistics, technology and retail. The com-
pany has operations in India, the United States of
America, Europe, Asia Pacific, Japan and the Mid-
dle East. Nearly 45 per cent of the revenue is con-
tributed through EDS-HP.

STOCK PERFORMANCE
1m 12m
MPHASIS LIMITED 20.59% 11.31%
SENSEX -8.00% -40.15%

GROWTH (%)
Last Qtr. Last Year Recommendation
Revenue 58.11% 37.62%
Profit 270.34% 41.77% Mphasis Limited has registered a robust growth rate over past few
years. As discussed with the Company Management, we expect
EPS ANALYSIS Applications Services and Infrastructure Technology Outsourcing to
drive growth in the future. The company share is trading at a low PE of
around 6.0X. We expect the company to outperform in the future and
we reiterate “BUY” on the stock with a target of INR 238.00.

Highlights/Recent Updates
Baring Private Equity increases stake in Mphasis
Baring Private Equity Partners has increased its stake in the Mphasis
Limited by 3.6 per cent to 12.2 per cent. Baring bought 7.6 Million
shares in a bulk deal from Merrill Lynch Capital Markets. Baring had
earlier sold 34.73 per cent stake in Mphasis to EDS in 2006, when
EDS acquired a controlling stake in Mphasis.
DIVIDEND ANALYSIS
Mphasis changes it Financial Year Ended to November-October
The company has change the financial year ended from April-March to
st
November-October, effective from 1 November 2008. Hence to facili-
tate the transition, the financial period closed at the end of October
2008 stands for seven month financial period, so it is not directly com-
parable with last year.
Witnessed cancellation & delays in Discretionary Projects
The company has witnessed few cancellations and delays in discre-
tionary projects. Cancellations are mainly in BFSI vertical, although the
company has not lost any client in any of the vertical. The company
has seen considerable vendor consolidation by clients, who demand
volume discounts while preferring to work with fewer vendors.

For Private Circulation Only 1 Hem Institutional Research Desk

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The company has issued bonus share for
three consecutive years (2003 to 2005) at the
ratio of 1:1
During the quarter ended 31st January 2009,
the company has added nine new clients
including six relationships through HP. This
includes clients in Manufacturing, Retail,
Pharma & Healthcare, Banking & Financial
Services, Logistics and Airline & Transporta-
tion.
The Company has 95 clients with an annual-
ized run rate of more than a million dollars
including seven clients in excess of USD 20
million.
The EDS-HP revenue is about 45 per cent of
the company total revenues (~$90 million),
which is just 1 per cent of HP total services
revenue.
For Private Circulation Only
COMPANY OVERVIEW
“Leveraging the benefits from EDS HP - Parent Company
of Mphasis”
Mphasis Limited is an IT company which consistently delivers global
Application Services, Business Process Outsourcing Services and
Infrastructure Technology Outsourcing Services through a combination
of technology, domain and process expertise.
The company offers solutions to verticals such as banking and finan-
cial services, logistics, technology and retail. The company has opera-
tions in India, the United States of America, Europe, Asia Pacific, Ja-
pan and the Middle East.
In 2006, Electronic Data Systems (EDS) acquired a controlling stake in
Mphasis Limited to become its parent company.
Mphasis supports G1000 companies around the world in the improve-
ment of their business processes. The company unique strength lies in
their ability to provide integrated solutions involving Infrastructure
Technology, Application & Business Process Outsourcing capabilities
across the globe. The convergence of technologies such as web ser-
vices, workflow software and business performance monitoring along
with business intelligence and customer focus drive all the services
offering. The company emphasis on developing flexible platforms to
allow their clients to implement business processes with minimal capi-
tal outlays.
The company is certified with ISO 9001:2000, ISO/IEC 27001:2005
assessed at CMMI v 1.2 Level 5 and is undergoing SAS 70 certifica-
tion. The company also provides SEI CMMI, ISO and Six Sigma re-
lated services support. While the forte is in the BFSI (Banking, Finan-
cial Services, and Insurance) and Technology industries, the rich ex-
perience and knowledge gained in various roles and projects under-
taken has enabled the company to expand their focus to the Health-
care and Telecom industries as well.
The company has a global footprint with delivery centers all over the
world, and has a staff of 29,988 professionals.
During the 7 month period ended 31 October 2008, the company has
added 47 new clients including 38 relationships through EDS-HP. The
client relationships have not only grown in size but also become more
broad-based.
The company caters 95 clients with an annualized run rate of more
than USD 1 million including 7 clients in excess of USD 20 million. The
billing rates have remained steady and manpower utilization improved
significantly across most of the business lines.
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Company’s BPO service was ranked No. 15
in the 2008 NASSCOM Annual Soft-
ware/Services & BPO Survey.
We expect Application Services (APPS) and
Infrastructure Technology Outsourcing (ITO)
segment to drive the growth rate in the fu-
ture.
Business Process Outsourcing (BPO) seg-
ment has registered a growth in employee &
Capital Expenditure where as a decline in
utilization rate and also decline in billing
rate.
Even the revenue contributed by BPO seg-
ment was around 18 per cent whereas profit
was just around 12 per cent.
For Private Circulation Only
PRODUCT OVERVIEW
Delivering value to Customers
The Company enables clients to solve complex issues and transform
their business; both in times of economic challenges as well as in peri-
ods of growth.
The Company spectrum of services includes Application Services
(APPS), Business Process Outsourcing (BPO) and Remote Infra-
structure Management Services (ITO). The company portfolio offers
services to clients across different industries including Financial Ser-
vices, Manufacturing, Healthcare, Telecom, Communication and Me-
dia Entertainment and Consumer & Retail industries.
Application Services (APPS)
The company has strong Applications Services expertise that spans
Applications Development, Maintenance and Legacy Modernization.
Application services is structured around industries and powered by
various practices.
Business Process Outsourcing (BPO)
Shifting from BPO to enhanced KPO work processes
The company BPO sector provides offshore contact centre solutions &
back-office support to clients across the globe. The company has
strong domain expertise in Financial Services, Healthcare, and Tele-
com and the company is growing its client base in Logistics, Utilities,
Retail, Automotive, Media, Consumer Electronics, and Publishing.
Infrastructure Technology Outsourcing (ITO)
The Company Infrastructure Management services focused on remote
infrastructure management services and have capabilities in remote
desktop management, database administration, midrange server man-
agement, service desk and data center management capabilities. It is
one of the latest sectors the company has entered and it has regis-
tered a robust growth rate.
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The company has added 1,193 people in the
last quarter ended January 2009, which in-
cludes 574 fresher. The total Employee
strength stands at 29,988.
There is a significant increase in margin
over the last few years. The main reason
behind the increase in margin is due to de-
preciating Indian Rupee clubbed with in-
crease in utilization rate and reduction in
traveling cost.
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GROWTH PROSPECT
As discussed with Mphasis Interim CFO - Susanto Banerjee indicate
that Applications Services (APPS) and Infrastructure Technology
Outsourcing (ITO) would continue to drive the growth in the future.
Although the business environment is challenging, but we expect that
new services provided by the company would be able to maintain the
revenue under the Economic slowdown.
The company has not disclosed their order book, but we expect the
highest growth to come from ITO segments. The maintenance busi-
ness will drive the value.
The company’s major clients EDS-HP contribute around 45 per cent of
the total revenue. The company has a win-win strategy with its par-
ents. The services provided by Mphasis are cost effective for EDS-HP.
Even we expect a growth in the revenue through EDS-HP.
The company has witnessed some cancellations and delays in discre-
tionary projects. Cancellations are mainly in BFSI vertical, although the
company has not lost any client in any of the vertical. The company
has seen considerable vendor consolidation by clients, who demand
volume discounts while preferring to work with fewer vendors
The company has registered a growth in margin also. The main reason
for growth in margin is mainly due to the current depreciation of Indian
Rupee. Around 68 per cent of revenue comes from USA and around
22 per cent from Europe. This has provided the company an additional
benefit. Even the utilization rate has increased on yearly basis.
Source: Company Presentation
De-listing of Mphasis by Hewlett-Packard..?? History says YES!!!
The value of the share can be unlocked, if the company got de-listed
by the parent company Hewlett-Packard. According to the past records
of Hewlett-Packard, it de-lists it subsidiary and even at a high pre-
mium.
4 Hem Institutional Research Desk
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The company has diversified it risk by diver-
sified business concentration vertical
The company is leveraging the benefits from
EDS & Hewlett-Packard, in terms of Revenue
generation and also in terms of new clients
The company has around 43 per cent of
revenue coming through BFSI verticals, but
now the company has entered into different
verticals to diversified their risk
High Promoter holding indicated the confi-
dence in the business model
Recent depreciation of Indian Rupee has
resulted in increase in margin
Economic Crisis could have a negative im-
pact on the company’s revenue and profit
For Private Circulation Only
SWOT ANALYSIS
Strength
Business concentration risk diversified by different vertical
The company has successfully diversified its business concentration
risk by broadening its base by serving into Technology, Manufacturing,
Financial Services & Insurance, Transportation, Healthcare, Consumer
& Retails and Telecom verticals. There is an increase in the area of
technology and healthcare over past few years.
Leveraging the benefits from EDS & Hewlett-Packard
Around 45 per cent of the total revenue comes from the company par-
ent EDS-HP. The company ultimate parents; Hewlett-Packard (HP)
has operations in 170 countries which will also help Mphasis to make a
presence where the company doesn’t have existence.
Weakness
Business concentration risk by vertical
The Company derived 43 per cent of their revenues for last quarter
from the BFSI, which include banks, brokerages, insurance companies
and financial institutions. Due to the current economic crisis, these
vertical are more porn to downturn.
Opportunity
High Promoter Holding
The total share held by the parent company EDS is more than 60 per
cent which in turn is a subsidiary of Hewlett-Packard. This gives the
company a better and stable picture.
Foreign Exchange
More than 90 percent of the company billings are in foreign currency,
hence the company is exposed to currency fluctuations and volatility. A
significant appreciation of the Indian Rupee would affect the company
earnings negatively, but under current scenario where Indian Rupee
has depreciated, the earning of the company has increased.
Threats
Economic Crisis
The company derived 89 per cent of its revenues from US and Europe.
The economic crisis in these regions can have an impact on the com-
pany revenues and profitability.
Competition risk
New competitors may enter in the markets or current competitors
could focus more in the market served by the company hence it inten-
sify the highly competitive conditions.
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There is high rival among Competing Firms
The potential entry of new competitor is
high.
Bargaining Power of Suppliers is very less
Bargaining Power of Consumers is high
For Private Circulation Only
Porter's Five Forces Model
Rivalry among Competing Firms
The service offered by the company has strong competition. There
exist many players in the industry; hence there is high rival among the
competitor.
Potential Entry of New Competitors
New competitors may enter the market. The new entrants could offer
or introduce new technologies or offer a different service model. Such
developments could have a negative impact on the company as the
competitor could offer similar services at a reduced price. The potential
entry of new competitor is high.
Potential Development of Substitute Products
The products and services offered by the company are mainly custom-
ized. We can see some regular product enhancement, but there can’t
be proper substitute for the products and services.
Bargaining Power of Suppliers
The input cost for the company is mainly manpower. Being an IT com-
pany, the major cost of expenditure is salary and allowances. So the
company is least affect in terms of bargaining power of Suppliers.
Bargaining Power of Consumers
There are many players in the market to offer similar products and
services to the clients. This results in intensified competition in the
market. Hence, the bargaining power of the consumer is high.
6 Hem Institutional Research Desk
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FINANCIALS

Annual Result
The company has registered an increase in margin. Profit before taxes
and Net Profit margin was higher than Operating Profit, mainly on ac-
counts on rise in Foreign Exchange gain and rise in dividend income.
The company operating income has registered a decent growth rate in
the past, and is expected to perform better in the future too.

The company derived 89 per cent of its

revenues for the latest quarter ended 31
January 2009 from the USA and Europe

Note: The Company has change the financial year ended from April-
March to November-October. To facilitate the transition, the company
financials are for the seven month financial period i.e. April to October.
Hence the financial are not directly comparable with last year.

Quarterly Result
st
For the Quarter ended 31 January 2009, Profit before taxes was
higher than Operating Profit, mainly on accounts on rise in Foreign
Exchange gain and rise in dividend income. The company has regis-
tered a growth of ~58 and ~270 per cent in Operating Income and Net
Profit respectively on Y-o-Y basis.

The margin has reported a continuous

growth over the past few years.

The current order book position is not disclosed, but in Infrastructure

Technology Outsourcing (ITO) and Application Services (APPS) has
an immense potential. The growth in the future will be driven by both of
these service segments.

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There is a continuous rise in the holding of
the promoter in the company.
Recently Baring PE has hikes their stake in
Mphasis by 3.6 per cent to 12.2 per cent.
For Private Circulation Only
SHARE HOLDING
Holding Pattern
Pledge-O-Meter
None of the share of the company is pledge.
EDS has acquired 60.83 per cent shares in the company which be-
come the parent company for Mphasis. And EDS is 100 per cent sub-
sidiary of Hewlett-Packard. Hence the Ultimate parent of Mphasis is
Hewlett-Packard.
8 Hem Institutional Research Desk
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Diversification into different segments like
APPS, BPO and ITO gives a stable picture to
the company.
Even entrance into different verticals like
Technology, Manufacturing, Financial Ser-
vices & Insurance, Transportation, Health-
care, Consumer & Retails and Telecom ver-
ticals diversified the company risk in current
Economic downturn.
For Private Circulation Only
KEY TAKEAWAYS FOR THE INVESTOR - ROAD AHEAD
Robust Growth Rate
Increase in Margin
Increase in Income due to ForEx
Higher Utilization Rate
Increase in Shares Prices, if the company got de-lists
Leveraging the benefits from EDS-HP
OUTLOOK
At Current Market Price of INR 193.10 and with Nov-Oct FY09E EPS
of INR 32.10, the stock is trading at a low PE of 6.0x. Given the cur-
rent global crisis, we believe there would be definite re-rating of the
valuation multiple assigned across business on a short term perspec-
tive. We are positive on the long term business prospects of the com-
pany and are confident about its financial performance. Even the
chances of Emphasis getting de-list will be additional benefits for mi-
nority shareholder. We reiterate “BUY” on the share with a price target
of INR 238.00 with a medium to long term investment horizon.
9 Hem Institutional Research Desk
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