Sell Mphasis - 3QFY12 Results Update - Motilal Oswal

Mphasis' 3QFY12 (quarter ending July; October year-end) re-emphasized the company's continued focus on profitability and limited growth visibility as it continued to increase utilization by cutting headcount in Applications, and to rationalize costs.

- Revenue was INR13.55b, +2% QoQ, marginally below our estimate of INR13.88b. HP channel declined 6.2% QoQ in constant currency while Direct channel revenue grew 5.8% QoQ in constant currency. Despite wage hikes, EBITDA margin at 19.7% was flat QoQ (in line) on continued cost control measures. PAT was INR2.09b, higher than our estimate of INR1.99b due to lower tax rate (22.7% v/s est 23.5%) and higher other income (INR393m v/s est INR329m).

- Management commentary indicated little respite over the near term from the challenges in the HP channel, as the ramp-down pressures may persist over the next few quarters. On the other hand, it expects to outgrow the industry in the Direct Channel, amid troubled deal velocity. Thrust on utilization of cash implies chances of a buyback in case there are no large acquisitions on the anvil over the foreseeable future.

- Our estimates are little changed after the results. Mphasis' focus on profitability by running a tight ship not only highlight poor growth visibility in the near term, but also concerns us as far as the long term prospects go. This is mainly because even when the environment improves; the company may have to grapple with high attrition rates and wage hikes to lateral employee base - a headwind to margins; let alone sacrifice some growth due to high utilization.

- Healthy cash pile and buyback expectations may support valuations, but mitigation of structural growth concerns is imperative before we draw more comfort in the stock. Maintain Sell.

Source : Equity Bulls

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