/ Reworking on its business model has helped MphasiS BFL post substantial
profit despite lean times for IT sector, says Rajesh Parishwad.
The IT sector was at its peak. Two software companies, working in
different domains and located either side of the globe, were not
marching with the pace of the industry. They were the Bangalore-based
BFL Software, IT solution provider and the California-based MphasiS
Corporation, a web solution firm, who were performing badly.
BFL had reported revenues of Rs 123.4 crore for 1999-2000 financial
year with a negligible profit of Rs 45 lakh while the MphasiS had
posted an income of Rs 22 crore, suffering substantial losses. With
that backdrop, the two loss-making companies merged in June 2000
to become MphasiS BFL, an IT consulting and services group and hoped
to leverage each other’s expertise and turnaround the fortunes.
2001-02: The software sector is reeling under hard times with huge
cut on technology spending across the globe and couple with 9/11
impacts. But, MphasiS BFL has overcome these hurdles and posted
an impressive results. The group’s net profit touched Rs 40.98 crore
for the full year ending March 31, a rise of 201 per cent over the
When most of the mid-sized software companies are facing the wrath
of the market conditions, the MphasiS BFL has scripted a totally
different story. It is a complete turnaround for a company that
faced huge losses only two years ago. Beating its projected figure
of Rs 310 crore made in January, the company reported consolidated
revenues of Rs 313.35 crore for the full year 2001-02, an increase
of 14.6 per cent, over last year’s income of Rs 273.34 crore. Net
profit stood at Rs 40.98 crore as against Rs 13.61 crore during
the previous year. In the fourth quarter of 2001-02, revenues have
increased by 4.5 per cent at Rs 83.99 crore on a sequential quarter-on-quarter
basis. The majority of the group’s revenues came from software development
work and its IT-enabled services subsidiary MphasiS BPO, which saw growth
of 48.3 per cent during the fourth quarter.
“It has been a rough year, it has been a tough year. I think the
important thing is that we have survived and actually become stronger
at the end of the year....The tough times have forced a change in
the business model, which has made the company less risky,” said
Jerry Rao, Chairman and Managing Director in a conference call with
The company has developed an unique onsite-offshore Virtual Team
Model (VTM) wherein onsite and offshore teams work in tandem on
the same project using technologies like Virtual Private Network.
It provides cost optimisation to customers by using lower cost locations
while leveraging time-zones and thus offering 24-hour development
cycle and testing systems.
He said, “We have become less of an on-site company but more of
an offshore firm that actually cost us a little bit in top line,
when we moved people from on-site to offshore. But it actually helped
improve our bottom line.”
However, MphasiS BPO is turning out to be the star-performer and
is being seen as “driver” of the company. It posted a revenues of
Rs 23.4 crore during full financial year 2001-02 against Rs 5.1
crore in the previous fiscal. Its performance has been impressive
with every quarter during the last year.
MphasiS BPO recorded revenues of Rs 8.68 crore in the quarter ended
31 March 2002 against Rs 2.81 crore in the corresponding quarter
of the previous year, representing a growth in revenues of 209 per
cent. On a sequential quarter-on-quarter basis this represents a
revenue growth of 48.3 per cent.
Analysts from HSBC observes, “Over the next 2-3 years, MphasiS BFL’s
topline and bottom line growth will be boosted by the scorching
pace of growth of MphasiS BPO. Revenue from BPO/IT-enabled is expected
to contribute 35 per cent to the company’s consolidated revenue
in financial year 2004.”
However, they predict that the software service revenue to grow
at a modest rate of 15 per cent in the medium term, given its strong
presence in banking, finance, insurance, logistics and health segments.
Margins would be protected because of sustained cost-cutting efforts.
Software development business which grew at 8.1 per cent over the
year, reflected the significant increase in volumes, despite shift
of work from onsite to offshore and fall in billing rates. In terms
of revenue contributions, financial services accounted for 45 per
cent as same in 2000-01 while the retail logistics and transportation’s
share dipped by three per cent during the same period. But, analysts
said that there would not be any significant volatility in this
business given its well-diversified portfolio. Interestingly, when
most of the IT companies are working towards increasing their share
of fixed-priced projects, MphasiS has witnessed sharp decline of
11 per cent in the fixed-priced projects which contributed 28 per
cent against 39 per cent last year. In fact, there has been slide
for the last couple of quarters and in the Q4, it was mere 21 per
cent of the total revenues. “The pricing pressure continues to haunt.
The billing rates are declining every quarter,” the company’s Chief
Financial Officer Ravi Ramu pointed out. The average price charged
by the company was $19 for offshore this year compared to $23 in
the previous year. However, the average onsite rates have marginally
declined to $60 this year from $61 last fiscal. But, the billing
rates of MphasiS BPO have increased from $10 last year to $12 this
The company added 11 new clients including two in MphasiS BPO. These
include two large banks in the Middle-East, a large international
insurance organisation, a leading management consulting firm in
south-east Asia, and a large project for web-enablement for a leading
The company has not had any great success in European Market and
business from UK and Germany has been modest. The US market contributed
to 67 per cent of the total revenues and Europe 15 per cent.
Utilisation rates in the quarter remained almost flat compared with
the quarter ended December 31, 2001 at 74 per cent. The company
is also sitting on pretty cash reserves of Rs 88.19 crore which
could be utilised for its future expansions. Rao said MphasiS BPO
would add 100 employees a month and take the headcount to around
2,000 from 705 by end of this fiscal. In the software services,
there would about 200-300 additions.
The company hopes to make revenues of Rs 390 crore to 400 crore
for the fiscal ending March 2003, projecting an increase of 28 per
cent over the previous year. MphasiS BPO which accounted for 8 per
cent of the company’s total revenues last year, would have a lion’s
share of about 20 per cent. With this rosy picture, it is not surprisingly
that the company’s stock has been on rise during the last couple