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Sunday, Apr 14, 2002

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MphasiS BFL: Sell/Buy on declines

Suresh Krishnamurthy

INVESTMENTS in MphasiS BFL stock can be liquidated. The stock now trades at Rs 647. The valuations are demanding and require growth rate in per share earnings to be robust even in the year succeeding the next financial year. Given this backdrop, it would be better to liquidate holdings in the stock now and re-enter when the valuation declines to attractive levels.

However, it would be better to watch out for the performance of MsourcE, the subsidiary of MphasiS BFL engaged in IT-enabled services. If MsourcE displays the potential to maintain strong growth rates beyond the next year, the prospects for the stock would need to be re-evaluated.

Suitability: The recommendation is suitable for investors with a conservative risk profile. MphasiS BFL is a stock with expectations of high growth. Stock prices of such firms are normally subject to a relatively higher degree of volatility.

Modest growth: MphasiS BFL reported a modest growth in revenues and profits for the quarter-ended March 2002 compared to the previous quarter, ended December 2001. Consolidated revenues rose 4.5 per cent, quarter-on-quarter, to Rs 83.99 crore. Expectedly, business at MsourcE was behind the growth.

MphasiS BFL's software services business showed up the highly competitive milieu the company is operating in. Billing rates were down and debtor days continued to remain high compared to the previous year. While client concentration levels did not rise, contribution to the revenues of the financial services vertical (industry) increased. This was mainly due to the lower growth of the technology vertical and the decline in revenues of the retail, logistics and transportation verticals.

In the case of software services, gross profits rose by less than 1 per cent to Rs 31.67 crore.

Increase in selling expenses and taxes compared to the previous quarter was more than offset by the reduced administrative expenditure and provision for doubtful debts. Overall, profits rose 13 per cent for the software services business.

Revenues of MsourcE rose 48 per cent over the previous quarter, while the software services business grew just over 1 per cent.

Profitability did not improve for MsourcE, though. Its net loss for the quarter rose to Rs 1.62 crore from Rs 0.28 crore for the previous quarter.

The rise in loss is attributed to the opening additional call centres as the company ramped up operations. MsourcE added two more clients this quarter to the existing eight. This indicates that as sales are ramped up, the rise in profits will be disproportionately higher in the next year.

Promising story: The fourth quarter capped a year of improved financial performance for MphasiS BFL which bounced back strongly from the debacle in the year ended March 2001. Importantly, the growth story appears likely to continue.

According to the company, profit growth in the following year is likely to be between 60-70 per cent spurred by a 200 per cent growth in revenues of MsourcE.

The expected revenue growth at MsourcE for the following year appears achievable. The expectations have been made based on contracts that involve annuity-based revenues.

This allows for relatively more accurate estimation of revenue growth. The guidance also factors only 11-12 per cent growth in revenues from software services, which appears reasonable.

Overall, a 60 per cent growth in profits — requiring average q-on-q growth of 12.5 per cent — appears achievable.

A 60 per cent growth in revenues would place the per share earnings for the coming year ended March 31, 2003 at Rs 39.

The growth rates from then on need to be in the high twenties to justify buying the stock at the ruling market price of Rs 647.

Since such growth rates are subject to a high degree of volatility and depend on a number of factors, prudence dictates that the stock be sold now and bought at declines.

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