MphasiS: Slack in growth does not justify current valuation

MUMBAI: The stock of MphasiS has gained 27% in one month despite the company's lacklustre performance in the April 2013 ended quarter. Part of the gain was on account of rumours that its parent is looking out for a stake sale, the news which the company denied in a press release. This and the fact that its growth continues to be under pressure make its current stock valuations unreasonable and unsustainable in the near term.

While at the consolidated level, MphasiS reported a strong 12% sequential jump in revenue at 267 million for the quarter, the growth was due to the contribution of recently acquired Digital Risk, a US based analytics company. It contributed $34 million or nearly 13% to the revenue of MphasiS. Excluding this, the organic revenue fell by 3.5% sequentially to $228 million.

The concerns over the subdued demand for the company's services have heightened after its April quarter performance. Its direct channel revenue excluding Digital Risk's contribution fell sharply by 5.2% sequentially, while HP channel topline dropped byb 1.8%. This shows that its direct business strategy has not been able to offset the dwindling revenue from its parent, HP.

In addition, the company's operating margin before depreciation on consolidated basis shrank by around 130 basis points to 17.2% sequentially as selling and general costs increased after the integration of Digital Risk. The pressure on margin is expected to remain given the onsite nature of services offered by Digital Risk.

The recent increase in its stock price has catapulted MphasiS's valuation. At the Monday's closing price of Rs 476.4, the stock traded at the trailing P/E of 13, which looks to be on a higher side given the slack in the business traction. Therefore, any increase in the stock price from hereon looks limited.