Changing gears to new businesses and new markets
Deccan Herald, May 6, 2002.

CORPORATE / Reworking on its business model has helped MphasiS BFL post substantial profit despite lean times for IT sector, says Rajesh Parishwad.

1999-2000: 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 previous fiscal!

Financials

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 analysts.

New model

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 year.

New markets

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 software company.

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.

Future

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 of months.

 
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