MphasiS: Against the Current

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—MphasiS BPO. While MphasiS BPO 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.


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

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 MphasiS BPO India is 73% held by MphasiS IT - MphasiS BPO US, 22% by Barings Private Equity, and the balance held by other private investors MphasiS IT - MphasiS BPO US is a 100% subsidiary of MphasiS. MphasiS BPO 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. MphasiS BPO ’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 MphasiS BPO 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.

(All figures in Rs crore)
  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.

MphasiS BPO performed exceptionally well during the third quarter although major investment in the subsidiary affected its profitability. MphasiS BPO’s revenues grew 17% q-o-q and 351% y-o-y to Rs 26.22 crore. MphasiS BPO 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. MphasiS BPO achieved 79% of the revenues coming from inbound calls and 19% from outbound calls.

MphasiS BPO is expecting a major revenue growth in the near future and is gearing up its operations to meet the future needs. MphasiS BPO 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. MphasiS BPO expects atleast 10 clients to ramp up to about 1,000 persons over a period of 3 years.

MphasiS BPO’ 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, MphasiS BPO 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.