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MPHASIS: Against the Current

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DQI Bureau
New Update

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.

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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

specialization:
Application

management, legacy systems transformation, enterprise application

integration and high-end architecture, IT consulting and IT enabled

services.

Consolidated Revenues

(March 2002):
Rs 313.34 crore

Offices:

India, US, UK, Netherlands, Germany, France, Japan, Hong Kong, Singapore

and Australia

Listing (stock

exchanges):
Mumbai, Kolkata,

Ahmedabad, Bangalore, Jaipur, and NSE

Face Value: Rs

10 per share




Current Market Price:
Rs 667 per

share




52-Week High/Low:
775/345



BSE Code:
526299



NSE Code:
BFLSOFTWAR

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.

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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%

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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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I   N   A   N  C Â

I   A   L  S

(All figures in Rs crore)

a 2001 2002 2003* 2004*
Sales 273.3 313.3 436.9 607.5
Other

Income
1.5 7.5 0.6 0.5
OPM

(%)
12.3 17 22.9 24.8
Operating

Profit
33.6 53.4 100.1 150.8
Net

Profit
13.7 41 68.4 102.7
Equity

Capital
15.9 17.2 17.3 17.3
EPS (Rs) 8.6 23.9 39.6 59.4
*Projected

 Year

ended March 31

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.

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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

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