Morgan Stanley retains `Underweight’ rating on Mphasis

RESEARCH: MORGAN STANLEY

RATING: UNDERWEIGHT

CMP: RS 677

Morgan Stanley retains `Underweight’ rating on Mphasis as they believe revenue and earnings growth for Mphasis could lag market expectations in FY10E. Growth rates have been eroding from high 15% q-o-q in October ‘08 to a mere 2% q-o-q in October ‘09, and the stock has reverted to growing in line with sector peers. At current levels, the stock’s risk/reward looks unfavourable and it is recommended that investors switch from Mphasis to HCL Tech or MindTree.

Management indicated that decision-making by clients has improved, however, it does not expect clients’ IT budgets to pick up in CY10 but does expects IT spending to be well controlled. Revenues from HP’s internal work has declined 12% qo-q . Excluding the AIGSS acquisition, Mphasis added only 71 (net) to headcount. The management expects to resume hiring from the current quarter.

Morgan Stanley expects Mphasis to grow its revenue in line with its peers in the 3-4 % q-o-q range over the coming quarters. Overall , with tax rates set to rise to 18% in FY11E from ~9% currently, Morgan Stanley forecasts revenue and earnings CAGR of 15% and 6%, respectively , over F2010-12 E. At ~15x FY10E, Mphasis trades near the higher end of its P/E range (4-18 x), for an earnings growth of 6% in FY10E.