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Suresh Krishnamurthy

FRESH investments can be considered in the stock of MphasiS BFL. The stock is emerging as one of the attractive exposures to the growing business process outsourcing sector.

The stock trades at a price to earnings multiple of about 21 times its earnings for the year ended March 2004. This compares favourably with the net profit growth of 40 to 45 per cent that MphasiS has projected for 2004-05. The confidence in the growth projections can be high considering that the company has able to achieve its projections for two years in succession.

Investment in the stock is however subject to significantly higher risks. Regulations in the US curbing outsourcing or massive appreciation in the value of rupee can derail growth. As of now, these risks are not intimidating.

Performance: At the consolidated level, MphasiS has recorded a 12 per cent decline in net profit for the quarter ended March 2004 compared to the quarter ended December 2003. This is mainly due to a sharp 18 per cent decline in profits from software operations.

The decline in software operations was not compensated by an increase in profits from MsourcE, the outsourcing subsidiary, since it was in a hiring mode in the last quarter. MsourcE's profits rose only 5 per cent, quarter-on-quarter, though revenues rose by 16.4 per cent.

In MsourcE, the number of employees, in the quarter ended March, rose by 864. In contrast, between April and December 2003, addition to employee base was only about 831. The massive increase in recruitment is a positive signal that the projections for the year ended March 2005 would be achieved.

The unimpressive performance of the software operations is a cause for concern. The increase in employee strength of the software division suggests that performance may be back on track in the next few quarters. The acquisition of Kshema Technologies is also likely to help MphasiS deal with poor growth of the software division.

In addition, MsourcE is the growth engine. The net profit margin of this business, which is growing at 100 per cent, is now only marginally lower than that of the software business. To a large extent this assuages the concern relating to profit growth stemming from the volatility in the profit performance of the software division.

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