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MphasiS BFL: Buy on declines

Mr Jerry Rao (right), Chairman and CEO, Mr Jeroen Tas, President and COO, MphasiS BFL... Banking on a BPO boom SHAREHOLDERS of MphasiS BFL can capitalise on the decline in price to raise exposures. The stock now trades at a multiple of around 15 times the earnings for the year ended March 2003. Lacklustre quarter In terms of profit growth, MphasiS BFL's performance was unsatisfactory. Gross profits fell 5.4 per cent in the quarter ended March 2003 compared to the quarter ended December 2002. Net profits, however, rose 3 per cent because of the decline in both selling expenses and provision for doubtful debts. Higher `other income' also muted the impact of a decline in operating profits.

However, the positive aspect to the decline in operating profits was a notable increase in the employee base.If not for substantial investments in fixed assets, the cash-on-hand would have continued to rise sharply. Promise of growth The increase in the employee base in MphasiS BFL's software services business is encouraging. The software service business of relatively small sized companies such as MphasiS BFL has been struggling to register growth. The March quarter was unimpressive for MphasiS BFL with sequential growth over the previous quarter restricted to less than 1 per cent.

In addition, the onsite software business � which accounts for 62 per cent of the company's service revenues � has been stagnating for the second consecutive quarter. Offshore business is, however, faring slightly better. The increase in the employee intake is also in the offshore segment.

The increase in employee base indicates the promise of higher growth in the coming quarters. According to management estimates, MphasiS BFL's software services business might grow around 10.5 per cent in the year ended March 2004.

This suggests that a decline in the software service business of MphasiS BFL will not neutralise the impact of any improvement in MphasiS BPO's profitability.

The latter's revenues rose by a robust 16.4 per cent over the quarter ended December 2002. MphasiS BFL expects MphasiS BPO's revenues to rise by 100 per cent in the year ended March 2003.

MphasiS BPO continues to make losses now. However, MphasiS BFL expects a double-digit operating profit margin in the second half of the following financial year. That will boost profit growth in the following year. Scope for growth MphasiS BFL's valuation multiples suggest that higher growth rates for more than a year is built into the stock price. Even on expected earnings for the year ended March 2004, the stock trades at a multiple of around 11. If the blistering pace of revenue growth in BPO continues such high earnings growth rates are possible. The potential for BPO, as of now, appears quite robust. In this context, MphasiS BFL's stock appears poised to deliver reasonable returns. Suitability: The risk involved in investing in stocks of growth companies is relatively high because of the uncertainty over earnings growth rates. This is true for MphasiS too.