May not reduce its dependence on Hewlett-Packard quickly

MphasiS may still have to depend on HP to drive most of its growth in spite of the recent acquisition of the Florida-based Digital Risk.

Analysts say that though the recent acquisition was to reduce dependence on HP, it may not pan out as expected in the short-term.

The Bangalore-based MphasiS paid $175 million to buy Digital Risk, a company that provides regulatory software solutions for the mortgage industry.

At present, MphasiS gets in excess of 50 per cent of its revenues from HP.

Research firm UBS has sounded out a sell rating on MphasiS with a target price of Rs 285 that is almost 30 per cent less than its Monday’s close. UBS, in its report, further added that the Digital Risk acquisition is likely to be margin dilutive or reduce earnings per share and may have a minimal near-term impact on earnings.

Bearish stance

Others share a similar sentiment. “Going ahead, we do not expect a hockey stick kind of growth recovery as HP would still contribute half of MphasiS’ total revenues and remain a major overhang,” Vimal Gohil, Analyst, Asit C. Mehta Investments Intermediates. The brokerage house has put MphasiS stock ‘under review’.

MphasiS will report its October quarter numbers on December 5 and, according to analysts, the acquisition should be read in conjunction with the performance in the quarter ending October. On Tuesday, MphasiS shares closed 2.97 per cent lower at Rs 389.

Despite this bearish stand, some analysts are positive on the company’s prospects going ahead. Ashwin Mehta and Pinku Pappan of Nomura in a note said that the acquisition is strategically in the right direction as it reduces exposure to the HP business.

At the end of the third quarter, MphasiS had Rs 2,575 crore of cash on its books and it is under increasing pressure as it relies hugely on business from HP and continues to lag behind its peers.

(This article was published on December 4, 2012)
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