Mphasis Equity Research

Date of Research – 19 January 2016

Price – Rs. 453.20

About the Company

MphasiS Limited (“Mphasis” or the “Company“) is a global IT services company delivering applications services, infrastructure services, and Business Process Outsourcing (BPO) services to clients in diverse sectors including banking & capital markets, manufacturing, communications, healthcare, transportation, and energy around the world. Mphasis has presence in the markets of Americas, Europe, and Australia as well as in the emerging markets such as India, Sri Lanka, Philippines, and Indonesia.

72 % of the overall revenue of the Company comes from the U.S., followed by 13 % from Europe, Middle East and African (EMEA) region, 8 % from India and 7 % from rest of the world. The Company’s banking and capital market domain constitutes 36 % of its total revenue. 

Mphasis was established in June 2000 after the merger of the U.S.-based IT consulting company MphasiS Corporation (founded in 1998) and the Indian IT services company BFL Software Limited (founded in 1993). In June 2006, Electronic Data Systems Corporation (“EDS”) acquired a majority holding in the Company. In August 2008 EDS was acquired by the Hewlett-Packard Company and Mphasis now operates as a subsidiary of Hewlett-Packard.

*The Company changed its financial year from 31st October to 31st March, and consequently, the results for the quarter ending 31 March 2014 represents results of 2 months of operations and the results for the year ending 31 March 2014 represents results of 5 months of operations.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014 (5 Months)FY 2015FY 2016FY 2017
Total Income from Operations5,796.302,593.835,794.816,087.88 6,076.36 
Expenses4,763.732,156.254,924.725,191.58 5,107.56  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)1,032.57437.58870.09896.31 968.80  
Depreciation144.8350.3998.0774.42 79.15  
Finance Costs33.0411.1427.9224.10 13.88  
Other income140.4852.20196.74196.05 238.61  
Exceptional items3.1654.83 15.17  
PBT995.18421.81937.68939.01 1,099.21  
Tax251.38119.13263.04269.64 307.63  
PAT (before Minority Interest and share of Associates)743.80302.68674.64669.38 791.58  
Profit/ (loss) attributable to Minority Interest– – 
Share of profit / (loss) of Associates– – 
Consolidated Profit / (Loss) for the year743.80302.68669.38 791.58  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014 (5 Months)FY 2015FY 2016FY 2017
Operating Profit Margin Ratio17.8116.8715.0114.72 15.94 
Net Profit Margin Ratio12.8311.6711.6411.00 13.03 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014 (5 Months)FY 2015FY 2016
Share Capital201.11210.13210.13210.15210.19 
Reserves & Surplus4,194.624,724.324,904.835,269.626,082.86 
Employee Stock Option Outstanding– 
Net worth (shareholders funds)4,404.734,934.465,114.975,479.776,293.05 
Other liabilities and provisions19.79107.0344.2160.7280.08 
Long term borrowings498.19431.39309.38178.89 
Current liabilities1,708.151,550.331,383.621,516.801,284.37 
Deferred Tax Liabilities7.105.6515.8649.9973.00 
Total Liabilities6,139.777,095.666,990.047,416.657,909.38 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014 (5 Months)FY 2015FY 2016
Fixed Assets247.95238.52223.80176.02172.82 
Noncurrent Investments741.83540.90249.90375.42 
Current assets4,439.533,126.563,269.403,947.914,176.79 
Long term advances and other noncurrent assets372.36637.43672.66782.11796.02 
Deferred Tax Assets101.46101.4696.8182.5694.12 
Other Assets17.22– 
Goodwill on consolidation (net)961.252,249.872,186.482,178.142,294.22 
Total assets6,139.777,095.666,990.047,416.657,909.38 

Efficiency Analysis

 
ParticularsFY 2012FY 2013FY 2014 (5 Months)FY 2015FY 2016
ROCE23.8119.017.8915.0313.85 
ROE / RONW17.9915.075.9212.3110.64 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014 (5 Months)FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)5,796.302,593.835,794.816,087.88 6,076.36 
Growth (%)8.19 %123.41 %5.06 % (0.19 %) 
PAT (Rs. Cr.)743.80302.68674.64669.38 791.58  
Growth (%)(6.12 %)122.89 %(0.78 %) 18.26 % 
Earnings Per Share – Basic (Rs. )35.4014.7132.1031.85 37.69 
Earning Per Share – Diluted (Rs. )35.3514.6932.0531.80 37.63 
Price to Earnings10.9927.4911.7815.40 16.55 

Dividend History

The Company has maintained an average dividend yield of 3.19 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Mphasis’s average current ratio over the last 5 financial years has been 2.44 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Mphasis’s average long term debt to equity ratio over the last 5 financial years has been 0.05 which indicate that the Company is operating with a low level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Mphasis’s average interest coverage ratio over the last 5 financial years has been 78.72 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Mphasis reported a promoter holding of 60.45 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 29.30 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.