See clear growth in infra, BPO biz: MphasiS

MphasiS' Q1 CY09 net profit and revenue stood at Rs 210 crore and Rs 977 crore respectively. MphasiS Q1 numbers not comparable due to changes in accounting year. (Also see: MphasiS announces results; stock down)

Ganesh Ayyar, CEO, MphasiS, said the company’s focus is on operational excellence and productivity. “These two things will take us into the future and is going to be our focus moving forward apart from focusing on customers.” He feels there is scope for infrastructure business. “It is a smaller business. But from MphasiS’ point of view, we see clear growth in that area and also the BPO business.”

Susanto Banerjee, Interim CFO, MphasiS, said there have been certain infrastructure and travel related costs which the company has been able to optimize. “This has also yielded to our margins growth.”

Q: Last quarter you had said that there was no major cancellation in order flow, yet there were some delays. No major pricing pressure and EBITDA level margin should be maintained at about 26% odd. Do you still hold that view or has that changed after this quarter?

Ayyar: The commitment which was given last quarter has clearly been delivered as you can see for the first time. We have exceeded Rs 10 in EPS, that’s a first in the history of MphasiS. If you compare quarter-on-quarter, our net profits have grown by 14.8% compared to the last quarter and on YoY basis we have grown by 270% in net profits. So, this has been a phenomenal quarter for MphasiS.

Q: How is the deal pipeline looking to you? Do you expect that you will be able to maintain this kind of a growth trajectory? Do you see more offshoring by HP-EDS?

Ayyar: First of all we deal with varied customers. Talking about the market place, we are operating in the same market as anybody else, so the market is very volatile as all of you know. If you look at our Q1 performance, we have retained our customers whether you look at top 5 or 10. Our relationship with HP and EDS has been holding good. So, that gives a source of confidence, but at the same time we really need to be prepared for the future. This is a market which is going to be uncertain. Focus on operational excellence and productivity are the two things which will take us into the future and that is going to be our focus moving forward apart from focusing on customers.

Q: If you could give us some more clarity on some sort of the deal flow or revenue flow you expect from the EDS? This is a three part question. A bit on the BSFI sector because you weren’t that sanguine about that entire space. Also, if you could give us some perspective on your exposure to the auto sector as there has been a bit of concern there and your revenue visibility from that space?

Ayyar: You commented on two industry vertical – BFSI and automotive. In BFSI, we have been holding Q1 performance compared to the prior quarters, so we have held our ground. But that sector is clearly under pressure especially in discretionary projects and applications business. I do believe there is scope for infrastructure business which is a smaller business. So, from MphasiS point of view, I see clear growth in that area and also the BPO business. I believe there is scope where we can go and attack with the entire offering that we have, leveraging on our existing relationship on one hand.

That same applies for the auto sector. We need to leverage on the entire portfolio of MphasiS and retain our position. It is tough. There is pricing pressure, discretionary projects are getting cut. At the same time, the decision cycles are getting longer and longer. In that context, leveraging on our existing customer, ensuring that we earn their trust and at the same time taking our entire portfolio to the market will give us that level of confidence.

On the other hand, we also need to ensure that operational efficiency and productivity remains our focus because that’s the only two things that we can focus on to ensure that we stay competitive in this market place.

Q: Let me come to you and ask how you are hedged versus the rupee? The rupee has been depreciating consistently, so do you think that improves your visibility or revenue chances and margins for the first half of FY09?

Banerjee: It is true that the rupee has been depreciating over a period of time now and we don’t know which way the rupee is going to go from here. But as mentioned earlier, we do have a hedging programme on our future revenues. We carry on with that hedging programme and suitably we have hedged considering the effectiveness test that we have according to the accounting standards. Then we hedge our positions in a balanced manner.

Q: One word on HP currently. There have been talks about them cutting their salaries. How does that impact you? Being an ex-HP man, what are the talks in terms of an HP-MphasiS merger at this stage?

Ayyar: That question is better directed to HP, so I would rather not comment on what is HP’s plan there. Let me move on to talk about salary cuts. Our focus is not going to be on cuts but focusing on how can we move our fixed cost into variable cost and give people their due when we are performing well. So, Q1 has been certainly good but we have three quarters ahead. The market is volatile. There is no question about that. We are more focused on converting our fixed cost into variable cost. At this point of time we have not exercised the option of any salary cuts.

Q: What are the margins that the company has managed in the quarter under review and how are you looking at the margins planning out considering that the rupee is now working in your favour?

Banerjee: There have been two things. Apart from the rupee which has depreciated and pulled the margins up there has been the operating leverage. Some of the operating leverages have performed well. Some of the operating leverage has not performed well. The operating leverage which has performed well are the billing rates a little on a blended basis. We improved on onsite with the high billing coming from Europe.

The operating lever which didn’t perform so well was utilization. It was anticipated because we invested in freshers in this particular quarter and utilization is always a lever which gets tweaked based on the demand available in the market. There have been certain infrastructure related costs which we have been able to optimize and travel related cost which we have been able to optimize which is also yielded to our margins growth.

Q: Can you give us some guidance in terms of margins and more importantly can you give us guidance in terms of what kind of revenue visibility you can see for FY09 or even first-half?

Banerjee: We don’t give a forward guidance on margins. But this much we can say that we are focused on cost optimization. We are focused on customers. We are focused on the coverage in terms of the geography and verticals and we don’t want to lose out on any customers. We want to win customers in the market place. There are deals happening in the market place, not that it is absolutely dry. There are tractions which are seen but the only question is when those deals are going to translate in revenues and which is the quarter it is going to translate into revenues in slight sketchy visibility as of now. But as we progress into the quarters, into the next quarter, we should be able to get a better visibility around it.

Q: Similar question to you, even if you cannot give us a number, do you expect that you will be able to maintain the kind of revenue that you have or do you think even a contraction is not ruled out?

Ayyar: Let me turn that question slightly differently – is that what we should focus on to try and do? That is going to be the management focus but the challenge during these times to give any forward guidance. It is absolutely hazardous because the market is extremely fluid. So at this point of time I will not make any forward prediction whether we will be able to maintain margins but that is going to be our focus. We are absolutely focused on getting our cost structure right, converting our fixed cost into variable cost. At the same time we really need to go after the market.

Let me give you a little bit more peak – there was a planned move to invest in sales resources in MphasiS. As a result we are seeing some rewards. Our ITO business has grown. Our business from EMEA is growing. So these are all planned activities which are yielding results. The key question is whether they will continue to yield result. That time would tell.