After leading a rather low-profile existence beleaguered by subdued growth over the past five years, Mphasis has come to the fore once again.
In the first week of April, private equity company Blackstone Capital Partners announced plans to acquire a controlling stake
in the Bengaluru-headquartered software exporter.
This is expected to add focus to its strategies and help it reduce its dependence on the erstwhile parent HP Enterprises.
Long-term investors may find the current valuation of the stock suitable to consider it for further research. Mphasis reported a sombre financial performance over the years.
From FY10 to FY15, its revenue grew at an annualised rate of 3% to Rs 5,794 crore. Net profit dropped from Rs 1,090.8 crore in FY10 to Rs 674.6 crore. It shifted its year ending month from October to March in 2014.
A major factor responsible for this lacklustre performance was the company's dependence on the parent, HP. In the fiscal ended October 2010, it had earned as much as 71% revenue from the HP channel.
Over the years, this business stream declined gradually, which prompted Mphasis to focus more on the direct business channel where it started approaching clients for projects. In hindsight, the strategy looks timely since it prevented the topline from shrinking significantly in the following years as the HP channel revenue shrank even more.
In the fiscal ended March 2015, Mphasis earned 69% revenue from the direct channel while the rest was from the HP channel. As the company gears up to operate under the new ownership, the direct channel will play a major role in its growth.
The momentum in the direct channel has increased. In the nine months to December 2015, the direct channel bagged orders worth $230 million compared with $264 million in the whole of the previous fiscal. The company aims to cross the $300-million mark in the contract value from the direct channel by the fiscal end.
As part of the deal between HP and Blackstone, Mphasis will get business worth $990 million (approxRs 6,630 crore) from HP over the next five years. The management hopes to win more projects through this arrangement.
The company expects to retain operating margin before depreciation in the range of 13-15% in the medium term. Its cash balance was Rs 2,726.5 crore as on December 2015.
Change in ownership is expected to help Mphasis seek opportunities to sell services to other companies that fall under Blackstone's umbrella. At Friday's closing price of Rs 488.3, the stock was valued at a trailing price-earning ratio of 15 compared with 17-20 for peers.