Systematix Institutional Equities

(1)

Investors are advised to refer through disclosures made at the end of the research report.

Mphasis

New deal TCV of $90mn, OPM improves by 120bps, Re-rating on cards

Results beat estimates: Mphasis declared strong 4.1% revenue growth for the

quarter driven by strong traction in the direct international business (up 7.9% qoq).

EBIT grew by 14% qoq, with an OPM gain of 120bps qoq. PAT grew by 18% qoq,

ahead of estimates, on strong operating performance and ETR normalised to 27%

(29.5% in 1Q). Results were good on all factors and may lead to estimate upgrades

and eventual re-rating for the stock.

Con-call highlights: Management maintained strong commentary and confidence on

business going forward driven by strong deal TCV addition and deal traction in its key

focus segment of GRC/Digital/IMS (contributed 70% of new deal add). It has been

adding deals in the digital risk portfolio both in the origination (recurring) and

forensic/quality check (project driven). The management has indicated better OPM

for 2HFY16 with revised band of 13-15% (up 100bps) despite wage hikes effective

3QFY16. The confidence on profitability is driven by improved business traction, exit

from low margin India voice BPO business (decline in wage base in BPO business

would cover up for the salary hikes to be effective in 3Q) and recovery in the digital

risk segment.

View: We believe the sustained traction in the direct channel revenue as evident

from strong deal TCV addition of $90mn ($440mn+ in the last six quarters) and eight

client adds during the quarter would cover up for the decline in HP revenue streams

(given its declining client concentration risk at 27% in 2QFY16 and would go below

23% by FY17e) and would help it gain in profitability on improved revenue mix. We

maintain a positive view on the stock given robust deal flow, improved profitability

and relative economical valuations (PE 10.7x, EV/EBIT 6.2x and EV/sales 1.1x on

FY17e).

Table 1: Quarterly financial statement

Quarter-ended

Particulars (Rs mn)

2QFY16

1QFY16

qoq (%)

2QFY15

yoy (%)

Revenues

15575

14964

4.1 14649

6 Cos t of servi ces

11542

11245

2.6 10953

5 Gross Profits

4033

3719

8.4 3696

9 Selling Expenses

981 1024

(4.2)

1166

(16)

G&A Expenses

886

797

11.2

631 EBIT

2166

1898

14.1 1899

14 Foreign Exchange Gain/(Loss)

65

15

333.3

39 Other Income

427

549 (22.2)

400 (81)

Interes t Cost

75

67

11.9

91 (17)

Excepti onal expense

53

179

0 PBT

2530

2216

14.2 2247

292 Income ta x expense

683

653

4.6

645 (57)

PAT

1847

1563

18.2 1602

(12)

Equi ty Capi tal

2101

2102

EPS (Diluted)

8.79

7.44

18.1

7.62 (32)

EBIT Ma rgins(%)

13.9

12.7

13.0 Ta x Ra tes (%)

27.0

29.5

28.7 Net Ma rgins (%)

11.9

10.4

10.9

Source: Company, Systematix Institutional Research

Systematix

Institutional Equities

21 October, 2015

RESULT UPDATE

Sector: IT

Rating: Buy

CMP: Rs460

Target Price: Rs600

Stock Info

Sensex/Nifty

27,270/8,241

Bl oomberg

MPHL IN

Equi ty s hares (mn)

211 52-wk Hi gh/Low

Rs 474/331

Fa ce va lue

Rs 10

M-Ca p (Rs bn)/($ bn)

Rs 98bn/$1.5bn

3-m Avg vol ume

$0.8mn

Financial Snapshot (Rs mn)

Y/E March

FY15

FY16e

FY17e

Net s a les

57,949

61,496

66,921

EBITDA

8,701

8,962

10,613

PAT

6,746

7,074

9,002

EPS (Rs )

32.1

33.7

42.8 PE (x)

14.3

13.7

10.7 EV/EBITDA (x)

8.3

7.8

6.2 P/B (x)

1.8

1.7

1.6 RoE (%)

12.7

15.3 RoCE (%)

13.6

13.9

16.6 Di vi dend yi eld (%)

3.7

4.3

4.9 Shareholding pattern (%)

Sep ’15

Jun ’15

Mar’15

Promoter

60.5

60.5 –Pl edged

-

FII

20.4

22.9

24.3 DII

8.3

5.8

5.0 Others

10.8

10.9

10.2 Stock Performance (1-year)

Rahul Jain

[email protected] +91 22 6704 8025

(2)

21 October, 2015

Mphasis

F

INANCIALS

(C

ONSOLIDATED

)

Profit & Loss Statement

YE: Mar (Rs mn)

FY14(5M)*

FY15

FY16e

FY17e

Net Sales

25,939

57,949

61,496

66,921

Total Income

25,939

57,949

61,496

66,921

Total Expenditure

22,046

50,228

53,298

56,715

COR

18,600

42,540

45,395

49,032

G&A

1,591

3,603

3,868

4,067

S&M

1,351

3,105

3,271

3,209

Other Expenses

-

EBIDTA

4,397

8,701

8,962

10,613

Depreciati on

504

980

764 1,776

EBIT

3,893

7,721

8,198

10,206

Other Income

500 1,967

2,071

2,345

Interes t

111

280

282

219 PBT

4,282

9,408

9,987

12,332

Extra Ordina ry Exps/(Income)

(64)

(32)

(232)

-

Ta x Expenses

1,191

2,630

2,681

3,330

Net Profi t bfr MI

3,027

6,746

7,074

9,002

Minori ty Interes t

-

Net Profit

3,027

6,746

7,074

9,002

*FY14 is a five month year as it moved its FY from Oct to March

Balance Sheet

YE: Mar (Rs mn)

FY14(5M)*

FY15

FY16e

FY17e

Sources of Funds

Equi ty Capi tal

2,101

Other Reserves

49,048

52,696

54,852

58,323

Net Worth

51,150

54,798

56,954

60,424

Unsecured Loans

4,715

3,161

3,036

2,911

Loan Funds

4,716

3,161

3,036

2,911

Total Capital Employed

55,865

57,959

59,990

63,335

Applications of Funds

Gross Block

11,511

12,014

13,164

14,214

Less : Acc Deprecia tion

9,274

10,254

11,018

12,794

Net Block

2,237

1,760

2,146

1,420

Capi tal Work in Progress

1 -

-

Goodwill

21,865

21,781

Investments

18,154

14,431

Current Assets, Loans & Advances

Sundry Debtors

7,883

6,306

5,556

5,706

Cash and Ba nk Balance

4,583

13,208

15,292

19,213

Loans and Adva nces

6,377

6,715

7,815

8,700

Other Current Assets

7,833

9,139

10,251

10,906

sub total

26,675

35,368

38,913

44,525

Less : Current Liabilities & Provisions

Current Liabilities

9,372

9,875

11,775

13,315

Provisions

3,695

5,507

Cash Flow

YE: Mar (Rs mn)

FY14(5M)*

FY15

FY16e

FY17e

Profit before tax

4,283

9,408

9,987

12,332

Depreciati on & w.o.

501

894

764 1,776

Net Interes t Exp

(385)

(1,359)

(1,789)

(2,126)

Di rect ta xes paid

(1,300)

(2,793)

(2,681)

(3,330)

Chg in Working Capi tal

(1,212)

(201)

438 (150)

CF from Opt Activities

1,975

6,165

6,719

8,502

Capex {Inc./ (Dec.) in FA n WIP}

(339)

(571)

(1,150)

(1,050)

Free Cash Flow

1,636

5,594

5,569

7,452

Inc./ (Dec.) in Investments

2,302

(3,433)

-

Other (includes a cquisition cos t)

239

340 1,789

2,126

CF from Investing Activities

2,201

(3,664)

639 1,076

Inc./(Dec.) in Debt

(4)

83 (125)

(125)

Interes t exp net

(107)

(225)

1,789

2,126

Di vi dend Paid (Incl. Ta x)

(4,178)

(1,722)

(4,917)

(5,532)

Cash Flow from Financing

(4,243)

(1,998)

(3,996)

(3,505)

Net Change in Cash

(67)

503 2,083

3,921

Opening Cash balances

3,599

3,532

13,208

15,292

Closing Cash balances

3,532

4,035

15,292

19,213

*FY14 is a five month year as it moved its FY from Oct to March

Ratios

YE: Mar

FY14(5M)*

FY15

FY16e

FY17e

Measures of Performance (%)

EBIT Ma rgin

15.0

13.3

15.3 Ta x/PBT

27.8

28.0

26.8

27.0 Net Profi t Ma rgin

11.7

11.6

11.5

13.5 As Percentage of Net Sales

COR

71.7

73.4

73.8

73.3 S&M

6.1

6.2

6.3

6.1 G&A

5.2

5.4

5.3

4.8 Measures of Investment

EPS (Rs .)

14.4

32.1

33.7

42.8 DPS (Rs .)

7.0

17.0

20.0

22.5 Cash per sha re

108.2

131.5

141.4

160.1 Di vi dend Pa yout (%)

48.6

53.0

59.4

52.5 Book Value (Rs .)

243.4

260.8

271.0

287.5 RoANW (%)

14.5

12.7

15.3 RoACE (%)

16.8

13.6

13.9

16.6 Valuation Ratios

CMP (Rs .)

460

460 P/E (x)

13.3

14.3

13.7

10.7 Ma rket Cap. (Rs. Mn.)

96,665

MCa p/ Sales (x)

1.6

1.7

1.6

1.4 EV (Rs. Mn.)

78,644

72,187

69,979

65,933

EV/Sales (x)

1.3

1.2

1.1

1.0

(3)

21 October, 2015

Mphasis

Conference call takeaways



Deal traction strong across the key segment of GRC (26%)/AMS (19%)/IMS

(25%). Added new deal TCV of $90mn for the quarter. Eight new client wins,

seven of them in Direct channel.



India voice business, that has been sold to Hinduja Global/Karvy data services,

had revenue of ~Rs360mn during 2QFY16 for a period of two months. Thus, a

similar amount would not feature in 3Q numbers. From a cost perspective, the

operating cost will be lower by ~Rs800mn on business exit, adjusted for

salary/other variable and severance paid during 2Q (the company has seen a

reduction in headcount by over 10,000 employees in 2Q on a qoq basis).



Salary hikes would be effective by 3QFY16 and would have an impact of ~170bps

on OPM. However, we expect the overall wage impact to be very soft given the

lower base of employees in 3Q compared to 2Q.



Mphasis has revised its expected OPM band for 2HFY16 to 13-15% despite the

wage headwind in the quarter up by 100bps (earlier band was 12-14%), on

improved revenue mix and momentum.



The commentary is confident on business across parameters.

Key financial highlights



Mphasis’ reported revenue grew by 4.1% qoq to Rs15.6bn – ahead of our

estimates. The revenue included two-month revenue from the BPO business that

it spun off during the quarter.



Direct international revenue grew by 7.9% in reported terms driven by strong

growth in the digital risk revenue (up by 10.3% qoq at $42mn for the quarter)

and sustained momentum in the organic channel (up 7.1% qoq). Digital risk

revenue has almost come to its peak revenue run rate of $44mn despite lower

project related revenue (earlier large forensic projects were driving the

momentum).



HP channel revenue declined by 4% qoq at Rs4.1bn, contributing 27% of

revenue. The revenue decline was in line with expectations on account of

sustained weak trends in project renewals by HP’s clients and client

ramp-downs. We expect the quarterly revenue run rate to remain in the narrow band

of $55-60mn over the next couple of quarters.



The company added seven new clients in the direct channel (one in HP) during

the quarter. Client additions were – five in BCM and three in Emerging

industries.



It added ~$90mn in new TCV during the quarter, which is the best-ever new deal

TCV addition (ahead of its run rate of $75mn in the last five quarters).



Operating profit for 2QFY16 was ahead of estimate at Rs2.1bn (our estimate

Rs2bn), up 14.1% qoq -- OPM up 120bps qoq at 13.9% for the quarter. We

believe the OPM performance will improve gradually over the next few quarters

on account of India voice BPO business exit, declining HP revenue share and

strong volume traction in the direct international business.

(4)

21 October, 2015

Mphasis

Valuation: We expect strong revenue/EBIT CAGR of 8/15% with improved

profitability (OPM gain of 200bps to 15.3%) would lower various concerns, leading to

the stock’s re-rating. We remain positive on Mphasis due to the strong deal/pipeline,

clear focus on niche capabilities (GRC/Digital), expected OPM gains on mix change,

strong cash generation (FCF yield of 6%) and economical valuations (PE of 10.7x

earnings and EV/EBIT of 6.2x on FY17e). We maintain Mphasis as our top pick in the

mid-tier IT space with a Buy rating and target price of Rs600 (raised from Rs520),

valued at 14x FY17e earnings (in line with the current discounting).

Chart 1: HP and Direct channel quarterly revenue ($ mn) trends

Chart 2: Sequential revenue growth and OPM trends

(5)

21 October, 2015

Mphasis

Nikhil Khandelwal Managing Director +91-22-6704 8001 [email protected]

Equity Research

Analysts Industry Sectors Desk-Phone E-mail

Jaspreet Singh Arora - Head of Research Cement, Building Material, Construction +91-22-6704 8062 [email protected]

Rahul Jain IT, E-commerce +91-22-6704 8025 [email protected]

Priya Ranjan Auto & Auto Ancs +91-22-6704 8067 [email protected] Salil Utagi Capital Goods, Engineering, Consumer Durables +91-22-6704 8064 [email protected] T. Ranvir Singh Pharma, Healthcare, Agrochem +91-22-6704 8016 [email protected]

Ajit Agrawal BFSI +91-22-6704 8066 [email protected]

Ankit Gor Mid Caps +91-22-6704 8028 [email protected]

Divyata Dalal Cement, Building Material, Construction +91-22-6704 8059 [email protected] Bibhishan Jagtap Auto & Auto Ancs +91-22-6704 8068 [email protected]

Rahul Khandelwal Mid Caps +91-22-6704 8003 [email protected]

Birendrakumar Singh Technical Research +91-22-6704 8024 [email protected] Equity Sales & Trading

Name Desk-Phone E-mail

Pankaj Karde Head - Institutional Sales & Sales Trading +91-22-6704 8061 [email protected] Jitendra Marchino, CFA Asia Sales +91-22-6704 8085 [email protected]

Dhanesh Padhya Sales +91-22-6704 8090 [email protected]

Dinesh Bajaj Sales +91-22-6704 8065 [email protected]

Jigar Kamdar Sales +91-22-6704 8060 [email protected]

Bhavik Shah Sales Trading +91-22-6704 8053 [email protected]

Vinod Bhuwad Sales Trading +91-22-6704 8051 [email protected]

Vahila Thoomu Assistant Manager +91-22-6704 8055 [email protected]

Sugandha Rane Support – Back office +91-22-6704 8056 [email protected] Production

Ramesh Nair Editor +91-22-6704 8071 [email protected]

Mrunali Pagdhare Production +91-22-6704 8057 [email protected]

(6)

21 October, 2015

Mphasis

DISCLOSURES/ APPENDIX I. ANALYST CERTIFICATION

I, Rahul Jain, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or is suers referred to in this research report, (2) No part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report by Systematix Shares & Stocks (I) Limited or its Group/associates companies. (3) has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

Disclosure of Interest Statement Update

Analyst holding in the stock No

Served as an officer, director or employee No

II. ISSUER SPECIFIC REGULATORY DISCLOSURES, Unless specifically mentioned in Point No. 9 below:

1. The Research Analyst(s), Systematix Shares & Stocks(I) Limited (SSSIL), Associate of Analyst or his relative does not have any financial interest in the com pany(ies) covered in this report.

2. The Research Analyst, SSSIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the company (ies) covered in this report as of the end of the month immediately preceding the distribution of the research report.

3. The Research Analyst, his associate, his relative and SSSIL do not have any other material conflict of interest at the time of publication of this research report.

4. The Research Analyst, SSSIL and its associates have not received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in this report, in the past twelve months.

5. The Research Analyst, SSSIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for the company (ies) covered in this report.

6. SSSIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in connection with the research report.

7. The Research Analyst has not served as an Officer, Director or employee of the company (ies) covered in the Research report. 8. The Research Analyst and SSSIL has not been engaged in market making activity for the company(ies) covered in the Research re port. 9. Details SSSIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

Sr.

No. Particulars

Yes / No.

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for inv estment banking transaction by _SSSIL No 2 Whether Research Analyst, SSSIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the

Research report No

3 Whether compensation has been received by SSSIL or its associates from the company(ies) covered in the Research report No

4

SSSIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the

Research report No

5 Research Analyst, his associate, SSSIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any

other products or services from the company(ies) covered in the Research report, in the last twelve month No

10. There are no material disciplinary action that been taken by any regulatory authority impacting equity research analysis activities.

STOCK RATINGS BUY (B): The stock's total return is expected to exceed 20% over the next 12 months.

ACCUMULATE (A): The stock's total return is expected to be within 10-20% over the next 12 months. HOLD (H): The stock's total return is expected to be within 0-10% over the next 12 months. SELL (S): The stock's total return is expected to give negative returns over the next 12 months. NOT RATED (NR): The analyst has no recommendation on the stock under review.

INDUSTRY VIEWS

ATTRACTIVE (AT): Fundamentals/Valuations of the sector are expected to be attractive over the next 12-18 months.

NEUTRAL (NL): Fundamentals/Valuations of the sector are expected to neither improve nor deteriorate over the next 12-18 months. CAUTIOUS (CS): Fundamentals/Valuations of the sector are expected to deteriorate over the next 12-18 months.

III. DISCLAIMER

The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy completeness or correctness.

This document is for information purposes only. This report is based on information that we consider reliable, but we do not represent that it is accurate or complete, and one should exercise due caution while acting on it. Descriptions of any company or companies or their securities mentioned herein are not complete and this document is not, and should not be construed as an offer or solicitation of an offer to buy or sell any securities or other financial instruments. Past performance is not a guide for future performance, future returns are not

(7)

21 October, 2015

Mphasis

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