Mphasis turnaround - is it worth long-term investing?
Raghunandan Money – Investment Khushiyon Ka.

Mphasis turnaround – is it worth long-term investing?

Published : April 6, 2018

Mphasis turnaround - is it worth long-term investing

Mphasis is an Indian software company operating under information technology (IT) sector. The Indian IT sector as a whole since is showing subdued performance since the last couple of years. However, there may be a cyclic rally in coming years in the IT sector as a whole. But, the individual Indian stocks performance of this sector is largely dependent on the efficient management. Also, most of the domestic software producers depend mainly on revenues from outside India. And to be precise, a major part of the revenue of Mphasis comes from international operations.

Now coming to Mphasis Limited. The parent US-based Mphasis Corporation was in computer programming and related activities in operation since 1998. And in 2000 the US-based company merged with the Indian BFL software company Ltd, to form Mphasis Limited. Specifically, Mphasis provides a suite of application development and maintenance services. It also operates infrastructure outsourcing services and business process outsourcing solutions to clients around the world. Further, Mphasis has the presence across 16 countries and is run by 24000 employees.

Its segments include –

  • Banking and Capital Market
  • Information Technology, Communication, and Entertainment
  • Insurance and
  • Emerging Industries

Geographically, its operation spreads to United States of America, India, Asia Pacific and Europe, Middle East & Africa. Plus it offers various solutions, such as Digital Customer Experience, NextAngles, Protecht, Wynsure, HyperGraf, InfraGraf, Robotic Process Automation, Blockchain, ComPASS, InfraGenie etc. Moreover, it provides services like –

  • Enterprise Web Technologies (EWT),
  • User Experience Management (UX),
  • Accessibility Consulting Services and
  • Payment Managed Services.

Beside this, it caters energy, government, health-care and hospitality sector in general.

Why PE-backed IT companies have high chances of a turnaround?

A PE-backed firm grows faster than a non-PE backed. This is evident with the growth in market capitalization of such companies. For instance, while large IT firms market capitalization has shown a marginal growth in last few years. And during same period PE supported IT companies saw a sharp rise. This might be due to the fact that technology shift plays the crucial role in PE investments.

In general, we see that PE firms bring in medium to long-term capital to the companies. They not only fund for geographic expansion but also invest in building out deeper technology capabilities for such IT-based companies. Moreover, they provide access to their portfolio companies in getting new business to IT service firms.

These private equity players tend to bring in strong product technology capabilities to the company in which they invest. They are capable of doing so as because in most cases they already engage themselves in innovative product companies at other locations. They simply ask the companies to focus on creating value. Thus, for a PE-backed firm, it becomes easy to take big jumps in terms of investment in innovative technology expansion. In most cases, these PE investors strike a good balance in offering flexibility and creating value.

A very crucial aspect of a good private equity player is that they do not interfere in day to day operations of the companies they invest in. However, they do play a crucial role in shaping up strategy, providing adequate governance in creating value. Furthermore, a business undergoing turnaround needs to find a focused investment. That investment which is capable to yield results in complete alignment to the defined goals. These goals include growth and reduction in unproductive expenses. And this is possible with a good PE investment.

Blackstone controlling stake buyout from HP Enterprise positive for Mphasis

  1. Blackstone is expert in picking growth-oriented companies across the globe from the diverse sector. And controlling stake purchase from HP Enterprises in Mphasis is its largest private equity deal in India. The deal is worth one billion dollars.
  2. Blackstone acquired 84% of the 60.5% stake in the company from HP Enterprise at INR 430 per share. Post this Blackstone made a plan to buy additional 26% of the company. It made an open offer from the public shareholders at Rs.457.50 a share. For this Blackstone had offered 54.9 million shares buyback to the general public but got only 2178 shares in return.
  3. Again Blackstone has proposed to buy back but at the revised rate of Rs.635 a share for which record date is fixed at 31 March 2017. It will be interesting to note that this time how many public shareholders liquidate their holdings.
  4. Another important point to consider by investors is that HP Enterprise did not exist in full from Mphasis. This deal with Blackstone also includes a master service agreement. HP Enterprise agreed to a minimum revenue amount escalating year over year to $990 million over the next five years. Also, as per the agreement, HP Enterprise included Mphasis in their preferred provider programme. This will be significant additional revenue opportunities for the Mphasis. This is backing Mphasis operational turnaround.
  5. HP Enterprise got Mphasis controlling stake as a part of the acquisition of US-based EDS for $13.7 billion. EDS has acquired Mphasis controlling stake for $380 million by the end of June 2006. This was an open offer deal of Rs.204.5 a share.

As a solution provider to BAFT positive for Mphasis

  1. NextAngles is a venture within Mphasis. It provides solutions to the member of the Bankers Association for Finance and Trade (BAFT). NextAngles provides artificial intelligence-powered compliance solutions to the financial services industry. BAFT members will now be able to prevent trade-based money laundering (TBML) activities.
  2. BAFT is a US company and is a global association for international transaction banking. It creates a bridge between financial institutions, service providers, and the regulatory community.
  3. Association with BAFT through NextAngles will help increase customer portfolio of Mphasis in the US. This is, in fact, a very high positive step for Mphasis on its future stream of revenue. Mphasis other customers include six top global banks. Also, 11 of 15 top global mortgage lenders and top three global insurance companies are their clients.

Analysts covered by Reuters strong on Mphasis share future performance

  1. Out of 24 analysts who are covering Mphasis, have a positive view of its future share price performance. As of the date, there are four buy recommendations on the stock, eight had given outperforming the broader market rating and seven analysts to hold the stock in their portfolio. Only four of them had said that the stock will underperform and one recommended to sell the stock.
  2. The analysts are positive on the share price of Mphasis as the past analysis of the financial performance and peeping into future therein has resulted in rising in mean sales forecasting by 11.42% for FY19 on the Y-o-Y basis. Sales in FY 18 stood at Rs.6502.68 Cr. Similarly the mean EPS forecast rose by 15.43% for FY 19 on the Y-o-Y basis. FY18 EPS stood at 42.02.
  3. Mphasis is a low beta (0.52) stocks with above industry dividend yield (2.75%) and hence is most suited for an averse investor with low-risk appetite who is seeking for additional stable income on their investment. The net profit margin of Mphasis is little above sector average of 11.69, again suggesting for stable earning by the company.
  4. The quarterly performance of Mphasis share price in terms of revenue generation and EPS is appreciating. This is also suggesting for some robustness in the share price of Mphasis in coming years.

Mphasis turnaround - Quarterly Revenue and EPS Performance of Mphasis Share Price from 2015-2017

Foreign Institutions were increasing stake in Mphasis

  1. There is total 19.31 Cr share issued by the Mphasis. Out of this promoters hold 60.4% in the company, institutions 30.88%, general public holds 3.36% and another type of investors holds 5.35%. This is accordance to latest Mphasis shareholding pattern data. One important point about promoters of Mphasis is that all the promoters are foreign promoters. You can download the last 3 quarters breakdown of shareholdings here
  2. Among institutions, the largest holders are 69 foreign institutions who combinedly holds 89.76% of the institutional shares in the company. This is in accordance with Reuter’s data on Mphasis shareholding. Institutions recent activity suggests that the strong interest in the company by them may be due to the expectation of strong growth momentum in coming future.
  3. The comparative institution’s activity in last one year is also appreciating as evident from the following table. Number if net buyers of Mphasis shares has increased from 1 to 10 in last one year period. Also, the total number of institutional holders have increased to 69 from 61 in the same period.

Mphasis turnaround - Change in foreign institutional holdings

Technically Mphasis share price seems to gear for above 870 levels

  1. Its share price on monthly technical charts after showing a long consolidation below 480 levels, broke out in May 2016. And also broke another major resistance of 570 levels, just one year after in May 2017. The prices sustained above 570 resistance levels and rallied towards next resistance of 870 levels in January 2018. Now it is hovering around this crucial resistance levels.
  2. The previous all-time high was of 796.50 levels which it made in November 2009. The weekly momentum of Mphasis is moving towards overbought zone suggesting for some slowdown in upside movement and giving a strong sense of strong support around 710 levels. An intermediate support is seen around 825 levels also. Trading above 710 support in coming months will open for 1010 levels and above it around 1190 levels.
  3. Thus the above analysis suggests for bullishness to be intact with its share price till it is trading above the above mentioned strong supports. Also, it is among one of the strong reason for the share price to make new all-time high in months to come.

Please visit Mphasis home page in the Market Intelligence section for more information on Mphasis share price, Mphasis dividend, Mphasis latest news, Mphasis shareholding pattern and many more relevant information before investing.

The justification for long-term investing in Mphasis share

A very positive happening for the company is that now Mphasis is completely debt free. The management has effectively reduced their long-term debt requirement to zero in last four years. In FY2014 net long-term debt obligation of the company stands at INR 491.46 Cr. Also, there is healthy reserves and surplus with the company. In FY 2017, the reserve and surplus of Mphasis stand at INR 5941.98 Cr. Thus, with no debt obligation and such a heavy reserve the company is standing at the crossroad, from where next phase of growth and expansion will not be very easy to deny.

The financial backing by a renowned private equity firm Blackrock, a healthy stream of revenue from the ex-parent company, HP, efficient management, trust by large institutions on the management and low free float, is enough to know a retail investor for considering Mphasis share in their long-term portfolio. Mphasis turnaround is geared up and it seems to a good Indian stock for long-term from mid-size IT sector.  What you are waiting for!!!


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