Do not touch MphasiS shares even with a barge pole

 

 

 

 

 

The quarterly results ended July 2011 of MphasiS are not satisfactory when compared to the previous quarter. Revenue increased from Rs.827.73 crore to Rs.916.60 crore. Net profit dropped slightly from Rs.219.29 crore to Rs.217.69 crore. Net profit margin dropped from 26.49% to 23.75%. The shares of MphasiS are traded in the stock markets at Rs.322.30 (26.09.11). MphasiS has added 18 new clients. MphasiS is India’s seventh largest software solutions provider. It is now experiencing pricing pressure from its parent company and its largest client Hewlett Packard (HP) and lower volume growth. But in the future, the move by HP to exit from PC business and concentrate on enterprise solutions and IT services could prove to be profitable for MphasiS provided HP gives more business to MphasiS. During the quarter, business from HP dropped by 5%. HP contributed MphasiS’s 65% of the net sales. Employee expenses have also increased for the past several quarters. MphasiS is trying to increase its business from non-HP customers. The addition of 18 new clients in the quarter will help it to progress towards this goal.

 

 

MphasiS is a cash rich company. It has a cash balance of Rs.286 crore in its kitty. Earlier, it acquired Wyde Corporation. This will add to the company’s revenues from this month. IT industry is facing uncertain times now. The share price of the company is on a downward trend. It is not advisable to buy the shares of this company now. In the beginning of the year, the share price of MphasiS was ruling at Rs.711. But now it has dropped to Rs.322. It may decline still further to below Rs.300 and possibly below Rs.250.

 

 

HP hived off its PC business and stated that it was going to concentrate on IT services. One thought that HP may merge MphasiS with itself to drive growth. But HP has decided to buy the UK based software company Autonolny for $10 billion. Therefore, there is room to conclude that HP is not interested in merging MphasiS with itself. Moreover, MphasiS has increased its business outside HP by 12.6% sequentially in the quarter. Business from HP enterprise has been muted in the last three quarters. MphasiS has to improve on this. Moreover, HP is not a world renowned software company. It was famous only for its PCs business, which it is now hiving off. What is the guarantee that it will be successful in software? If it fails, then MphasiS will also sink along with it. This is a big risk MphasiS is carrying on its head. Depending on one single client for survival is a risky business. When HP insisted on price cut for its services, MphasiS could not say no. In the PC business, HP had a brand image after the acquisition of Compaq. It has no such brand image in the software business.

 

 

Out of the 70% revenue MphasiS receives from HP, 10% comes from projects it does for HP mostly from the enterprise service unit. The remaining 60% comes from projects where MphasiS acts as a sub-contractor. MphasiS is Bangalore-based IT and BPO service provider. What was the reason for it to acquire Wyde Corporation? Wyde Corporation is an international software vendor and creator of Wynsure, which is an insurance policy administration solution. MphasiS will acquire 100% stake in Wyde Corporation. After the acquisition, Wyde Corporation will act as a product business within MphasiS’ insurance vertical. Even after the acquisition, the Wyde management team, led by Jean Rene Lyon will continue to work for his company. Wyde Corporation has 25 clients and a strong presence in the mid market segment. The amount involved in the acquisition deal is not divulged by MphasiS. Wyde Corporation has more than 200 employees. Earlier, MphasiS acquired AIG’s captive unit in India in 2009.

 

Now MphasiS will focus on three verticals – banking and capital markets, insurance and emerging markets. IT services for the banking and capital markets generate 40% of the company’s revenue. MphasiS gets around 12% of its business from servicing insurance sector. After the acquisition of Wyde Corporation, its revenue from insurance sector will increase. This will be reflected in its next quarterly results ending October 2011.

 

 

Earlier, MphasiS saw its share price plunging after one of its UK based clients Santander started the process of moving the operations of all of its Indian call centres back to UK due to customer dissatisfaction. The company’s board considered buying back upto $65 million worth of its shares from the open market involving 10% of its paid up capital and free reserves, as part of a plan to use its $422 million of cash reserves. No decision has been taken yet. But it is doubtful whether this decision can arrest its declining share price trend. Stock market has no confidence in the company’s shares. Investors have no confidence in MphasiS. It is doubtful whether even its parent company HP has confidence in MphasiS. It is a share which should be ignored by the investors.