Quantum Securities

MphasiS BFL

Results Update

Last traded price: Rs278 (June 9, 2004)

Rec: Buy

Highlights of the conference call:

MphasiS results are in line with our expectations. The bottom line received a boost due to forex gains and tax credit from US operations which are explained below.

Forex gains have resulted on account of hedged position essentially carried forward from FY04. The company had hedged position of $76.45mn and unamortized premium of Rs43.66mn at end FY04 which have changed to $108.57mn and Rs17.97mn at end Q1FY05. The covers around the month of Apr-04, which could have been at higher rupee rate, should result into minor loss over coming two to three quarters.

Beginning Apr-04 the group has restructured its IT services operations in the US. This included merger of the profitable branch of erstwhile BFL Software in the US (called MphasiS BFL) into MphasiS, USA which has accumulated losses. Consequent to this restructuring the profitability of MphasiS USA has improved and is likely to recoup its past accumulated losses to the extent of $3.28mn. As a result a deferred tax asset of Rs60.12mn has been recognized in the Q1FY05. We think that the overall effective tax rate for the whole year will be lower as MsourcE, which will become wholly owned subsidiary, too has some accumulated losses.

Top line includes sales of $1mn from Kshema Technologies for one month of its integration with the group. Around 26 clients and 431 employees came on board from Kshema. The acquisition resulted into goodwill of Rs922mn of which Rs17.4mn will be allocated to deferred stock compensation on allotment of the relevant shares and amortized over the remaining vesting period of the options. The equity dilution will be approximately 3.45mn shares.

The company is awaiting approval from FIPB for the acquisition of preferred stocks from minority shareholders at MsourcE. This should result into equity dilution of 4.9% on the base of 74.57mn shares.

There has been salary hikes w.e.f. 1-Apr-04 . This includes 0-7% hike for onsite employees, 10-15% increase in case of ITS offshore and 12-16% at BPO offshore.

Billing rates for offshore software development and BPO operations remain steady at $12 per person hour. While the onsite software development rates declined to $62.

Net employee addition was placed at 305 in ITS (net of increase from Kshema of 431 and transfers to BPO of 122) and of 457 in BPO services to 2300 and 4740 respectively.

New client additions were 10 at ITS and 1 at BPO.

We have fine tuned our revenues and net income estimates for FY05 to Rs8.14bn up 40% and Rs1.43bn up 50% or Rs18.1 per share considering additional dilution of equity. We maintain BUY recommendation.