The prospects of growth in the business process outsourcing (BPO) sector has
encouraged a number of established software majors to venture into this space.
Most of the companies have decided to start from scratch whereas Wipro decided
to acquire a BPO major, Spectramind to make its presence felt in the segment.
Among the major companies, an early entrant into BPO was software services
company MphasiS, which set-up a BPO subsidiary–MsourcE. While MsourcE is
beginning to make a mark in the BPO space, MphasiS too is witnessing impressive
growth in its software business too. MphasiS reported excellent third quarter
results and the fourth quarter results are expected to be strong.
F A C T S H E E T |
Website: www.MphasiS.com 139/1, Aditya Complex, Hosur Road, Koramangala, Bangalore 560095 Tel: +91-80-552-2713 Fax: +91-80-552-2719 Area of Consolidated Revenues Offices: Listing (stock Face Value: Rs |
Bangalore-based MphasiS Ltd (MphasiS) was formed as BFL, and was renamed
MphasiS after it acquired by California-based MphasiS in the year 2000. The post
merger performance was volatile with the company reporting occasional losses due
to the restructuring of its operations. The company stabilized its performance
in the year 2001-02 and has shown impressive performance despite the overall
slowdown in the global IT market. While MphasiS has not been immune to these
problems, its focus on a niche area and the growing IT enabled and BPO services
has started yielding positive results.
MphasiS provides software services and solutions in the area of application
management, legacy systems transformation, enterprise application integration,
and high-end architecture and IT consulting with a focus on BFSI, Retail,
Logistics and Transportation, Technology and IT Enabled Services. It also
provides IT enabled services, which includes call centers and business process
outsourcing (BPO). MphasiS is largely focused on the BFSI space and achieves
major revenues from this vertical.
MphasiS IT enabled services subsidiary MsourcE India is 73% held by
MphasiS-MsourcE Corporation US, 22% by Barings Private Equity, and the balance
held by other private investors MphasiS-MsourcE Corporation US is a 100%
subsidiary of MphasiS. MsourcE provides services in the area of in and out-bound
call centers, e-mail / chat, helpdesk and other operations services such as
investigations, collections, new applications, reconciliation, settlement and
others.
MphasiS closed fiscal 2002 with consolidated revenues of Rs 313.35 crore and
a net profit of Rs 40.99 crore compared to sales of Rs 273.34 crore and net
profit of Rs 13.61 crore in the previous year. Almost 45% of the revenues came
from the financial services segment, 27% from retail, logistics and
transportation, 20% from technology and 8% from IT enabled services. MsourcE ’s
revenues stood at Rs 23.40 crore compared to Rs 5.10 crore whereas its net loss
stood at Rs 4.59 crore as against Rs 4.34 crore in the previous year.
MphasiS
has reported an impressive performance in the third quarter and 9 months ended
December 2002 with the third quarter results beating the expectations. The 9
months consolidated revenues stood at Rs 308.37 crore with the share of revenues
from MsourcE increasing from 7% of total revenues in the third quarter ended
December 2001 to 23% in the third quarter ended December 2002. MphasiS
consolidated third quarter revenues stood at Rs 115.95 crore, up 13% q-o-q and
38% y-o-y. Its net profit jumped 13% q-o-q and 37% y-o-y to Rs 18.18
crore.19.11%
Revenues from MphasiS’ software segment (MphasiS IT) grew 11% q-o-q to Rs
89.73 crore whereas the net profit was up by 33% q-o-q to Rs 20.07 crore.
MphasiS IT added five clients in the quarter to take the total number of active
clients to 93.
It achieved 14% of revenues from the top client with the top five
contributing to 45% of the total revenues. Two of its clients now contribute to
more than $10 million revenues and 4 of its clients are in the $5 million plus
bracket, which is a positive sign in terms of its large client handling
capability.
Revenues from financial services vertical formed 55% of the total revenues,
while 29% came from retail, transport and logistics and 16% from technology
segment. In terms of geography, MphasiS IT saw a dip in revenues from the
European region with other geographies growing sequentially.
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MphasiS wrote off bad debts write off of Rs 1.60 crore during the third
quarter compared to Rs 47 lakh in the first half ended September 2002. MphasiS
IT ‘s employee declined from 1,200 in the second quarter to 1,180 in the third
quarter but the utilization improved from 74% to 79%. Revenues from onsite
continue to be high but declined from 67% in the second quarter to 62% in the
third quarter. Onsite rates declined 10% sequentially whereas the offshore rates
were up 11% sequentially.
MsourcE performed exceptionally well during the third quarter although major
investment in the subsidiary affected its profitability. MsourcE’s revenues
grew 17% q-o-q and 351% y-o-y to Rs 26.22 crore. MsourcE reported a loss of Rs
1.89 crore in the third quarter against a profit of Rs 1.27 crore in the first
two quarters. This was due to the addition of 489 employees in the quarter,
which took its total employee strength to 1,635. The company is witnessing a
ramp up by few of its clients, which led to the investment in telecom
infrastructure and employee ramp up. MsourcE achieved 79% of the revenues coming
from inbound calls and 19% from outbound calls.
MsourcE is expecting a major revenue growth in the near future and is gearing
up its operations to meet the future needs. MsourcE has one mature client, and
four of its clients are in the process of a ramp up whereas the company is
working in the pilots of 10 clients. MsourcE expects atleast 10 clients to ramp
up to about 1,000 persons over a period of 3 years.
MsourcE’ 85% of the revenues came from BFSI, 12% from Insurance and 3% from
retail whereas geographically, US revenues stood at 88% whereas Europe stood at
12%. In India, MsourcE has operations in Bangalore and Pune and it has recently
opened a call center in Mexico that would provide services to one of its major
financial services client in US. The Mexico center has been set up with an
initial investment of $1 million and has a capacity of 100 seats, which can be
expanded to 300 seats.
MphasiS currently trades at Rs 667 discounting the projected March 2003 EPS
by 17 times and March 2004 EPS by 11 times. MphasiS witnessed a sharp upward
rally after the announcement of the third quarter results. MphasiS’ share
price jumped from Rs 380 in August 2002 to Rs 790 in January 2003 after the
announcement of the second and third quarter results. The stock has declined
recently on account of poor market conditions and the war in Iraq. While this
may be true for all the companies, we feel that the strong performance by
MphasiS in the fourth quarter and sustained growth in the next few years would
lead to a re-rating in the company’s valuations. Market Outperformer.
Sushanto Mitra is the founder
of Technology Capital Partners