MPHASIS BFL LIMITED: Size Does Matter

With the tech slowdown fading away into his tory, its time once again for
Indian technology services companies to look for expansion. Across the industry,
new facilities are being commissioned and recruitment has reached a feverish
pitch. The overall mood, unlike the past, is however, somewhat circumspect.
Salary hikes are sober this time around and even expansion plans are less
aggressive than in the past. Lessons from the past it seems have been kept in
mind.

At the same time, companies also realize that size is becoming a critical
factor for survival. Consequently, some of the mid-market companies are working
hard to be a part of the big league. Among them is Mphasis that recently
acquired Kshema Technologies and is now planning an ADR issue on the NASDAQ to
fund its expansion.

Bangalore-based Mphasis BFL is a provider of software service and solutions
in the area of application management, legacy systems transformation, enterprise
application integration and high-end architecture and IT consulting with focus
on BFSI and ITeS. It also provides BPO IT enabled services in voice and non
voice categories, which includes call centers and business process outsourcing (BPO).

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, enterprise application integration, business process outsourcing and IT consulting. Revenues: (March 2004) Rs 280.6 crore Offices: India, US, UK, Netherlands, Germany, Japan, Hong Kong, Singapore, Australia, Mauritius and Mexico. Listing: (Stock Exchanges): Mumbai BSE, NSE, and KolkataAhmedabad, Bangalore Jaipur and NSE Face Value: Rs 10 per share Current Market Price: Rs 485 per share 52 Week High/Low: 2300/317 BSE Code: 526299 NSE Code: BFLSOFTWAR

Mphasis has seven offshore development centers based at four locations in
India, China and Mexico and operate out of twenty offices in eleven countries.
The chairman and the CEO of the company is Jaithirth Rao. Its and its current
equity stands at Rs 35.4 crores with FII’s holding 21.8%, private corporate
bodies holding 60.5%, Indian public holding 6.0% and others holding the balance
11.7% of the stake.

For the financial year ended March 2004, the company’s revenues grew 35%
amounting to Rs 580.6 crore as against Rs 429.3 crore earned in the previous
year. Y-o-y, revenues from US and Europe grew 45% and 69% respectively, but
revenues from Asia Pacific, Japan and India and the Middle East declined 14%,
50% and 20% respectively. The net profit for the same period was Rs 98.6 crore,
up 47% y-o-y. Mphasis earned 62% of its revenues from onsite activities as
compared to 38% of the revenues earned form business activities done offshore.
Time and material projects contributed 75% of the total revenues and the balance
25% was contributed by the fixed price projects. Revenues from the ITES,
financial services and the retail, logistics and the transportation verticals
grew a 100%, 18% and 28% respectively, whereas the revenues from the technology
vertical declined a mere one percent, year-on-year.

The company reported a healthy set of figures for the last quarter of the
financial year 2004, registering a revenue growth of 7% q-o-q and 31% y-o-y,
amounting to Rs. 158.8 crore. The financial services and the ITeS verticals
contributed 35% of the total revenues apiece, whereas the retail, logistics and
the transportation vertical contributed 19% followed by technology contributing
the balance 11%. The net profit was Rs 25.1 crore, down 12% sequentially as
compared to Rs 28.5 crore but up 34% y-o-y amounting to Rs 18.7 crore. The
decline was mainly attributable to the significant appreciation of the rupee
during the quarter and due to gains on sale of certain fixed assets as a result
of the shifting of the premises of certain offshore development centers back
home during the quarter ended December 2003. As far as the region-wise revenue
breakup is concerned, US lead by contributing 77% of the total revenues earned
during the quarter followed by Europe contributing 17%, whereas Japan, India and
Middle East and Asia Pacific contributed 2% each.

Mphasis recently entered into an agreement to acquire Bangalore-based Kshema
Technologies, a software solutions provider in industrial automation and
embedded technologies, healthcare and life sciences, for approximately $ 21.0
million through a combination of stock and cash. The cash component would
approximately be $ 6.8 million and the transaction is expected to be EPS
accretive in the very first year. Mphasis claims that the acquisition would help
them to become a full service, broad spectrum IT services and BPO firm by having
clients like HP, NEC, Symbian and Invensys under its belt.

During the March 2004 quarter, Mphasis announced that it plans to acquire
Mumbai based Onida Infotech Services, which is a division of MIRC Electronics
Limited, for an amount of Rs 3 crore in an all cash deal. Onida Infotech has
annual revenues of Rs 4 crore and operates in the areas of SAP implementation,
maintenance and support activities. The company asserted that this would provide
a fillip to its ERP implementation practice and strengthens client service
offerings.

The company’s BPO subsidiary, Msource Corporation, based in NewYork, with
delivery centers in Bangalore, Pune and Tijuana (Mexico), provides remote
services in the contact center and BPO space across service verticals like
retail banking, logistics and transportation, utility, credit cards and
insurance. The BPO services recorded a robust growth by earning revenues of Rs
56.2 crores in the quarter ended March 2004, as against Rs 30.5 crore and Rs
48.3 crore in the same quarter of the previous year and the immediately
preceding quarter registering a growth of 84% and 16% respectively. The net
profit stood at of Rs 7.9 crore as compared to Rs. 7.6, up 5% sequentially. The
total staff strength is 4283 as at March 2004 with an active client base of 19.
Msource is now a 100% subsidiary of Mphasis. The company has acquired the
minority 25.3% stake in the company valued at Rs 156.0 crore in a combination of
stock and cash. The reported figures give the subsidiary a valuation of 3.5
times Fy04 revenues.

Mphasis Eemployee strength at the end of March 2004 stood at was 1995, higher
by an addition of 184 over the previous quarter and by 677 over the strength as
compared to the December 2003 and as on March 2003 respectively.

The current year expansion and acquisitions bodes well for revenue growth in
the next couple of years apart from improvement in margins due to increasing
scale of operations. At the same time, the low level of offshore delivery and
mid-market positioning remain areas of concern.

The share of the company is currently traded at Rs 485.0 discounting our
estimated March 2005 and March 2006 EPS by 13 and 10 times respectively. In line
with improving performance and the general bullish trends in the market, the
Mphasis shares reached their peak of Rs 770.0 in December 2003. Since then the
impending ADR issue and the political uncertainty have taken their toll on the
share price. Going forward, we believe that until the ADR issue, the stock will
remain range bound and investors could wait until its successful closure before
investing. which is reasonable considering its growth rates and standing in the
sector. Market Performer.

Sushanto Mitra is
the founder of Technology Capital Partners The views reflected here are of the
author and not of this publication. No liability is accepted for losses based on
the information presented here