Mphasis

Event Update | IT
August 1, 2011
MphasiS
MphasiS acquires Wyde
MphasiS has entered into a definite agreement to acquire 100% stake in Wyde Corporation (Wyde), an international software vendor and creator of Wynsure an insurance policy administration IP solution. The deal is an all-cash deal. MphasiS has not disclosed the consideration amount paid for the deal, but generally product companies are valued at 2.5x4x sales. Thus, assuming 3.5x sales, in our view MphasiS will pay US$105mn. As of April 2011, MphasiS had cash of US$422mn in its books. Wyde is headquartered in the US and its operational headquarters are at France. Wynsure is a multi-language, multi-currency and easily customisable software that offers policy administration, claims and billing solutions across life and annuities (L&A), disability, health and property and casualty (P&C). Wynsure platform can be deployed at an insurance company either for one business line at a time or as a complete end-to-end solution. Wyde is a debt free company. In CY2010, the company reported annual sales of US$30mn (broad revenue break-up 60% from L&A and 40% from P&C) with EBITDA margin of 18%. PAT margin of the company stood at 1718%, as it was aided by other income generated from US$10mn cash in its accounts. Wyde gets 2730% of its revenue from license selling, 6570% from services and another 67% from maintenance activities. Wyde has 25 clients globally (none of them is overlapping with MphasiS clients from the direct channel) 14 in the US, 9 in France and 2 in Canada. Wyde gets 50% of its revenue from its top five clients 18% revenue from the top client, 12% from the top second client and 10% from the top third client. Wyde has an employee base of 200 people (sales team comprises eight employees), out of which 100 are based in France. This gives MphasiS a footprint in Continental Europe. Post the acquisition, these employees would operate in the product business of MphasiS. This will aid the non-linear revenue of MphasiS. Outlook and valuation: Management highlighted that the insurance industry is globally growing at a 15% CAGR in terms of IT spending. We expect Wyde to grow at a 10% CAGR, which is lower than MphaisS average rate, as insurance IT spending lags spending in other verticals. The companys acquisition of a 100% stake in Wyde is expected to push revenue CAGR to 16.2% from 15% (earlier) over FY201113E. Also, the companys incremental growth due to Wyde at a higher EBITDA margin of 18% is expected to be EBITDA accretive for the overall company. Thus, we revise our EBITDA margin estimates of 17.4% and 17.2% to 17.8% and 17.6% for FY2012E and FY2013E, respectively. The acquisition is expected to be marginally EPS accretive, as higher operational profits due to the same are expected to be nullified because of lower treasury gains post the acquisition, leading to cash outgo of ~`467cr. Thus, we revise our EPS estimates marginally upwards by 1.1% and 1.7% to `39.4 and `45.2 for FY2012E and FY2013E (October ending), respectively. We value the company at 45% discount to Infosys target PE of 20x i.e.11x `43.1 (FY2013 March ending), which gives us a target price of `482 and recommend an Accumulate rating on the stock.
Please refer to important disclosures at the end of this report
ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (`cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 9,315 0.7 712/355 122240 10 18,314 5,517 MBFL.BO MPHL@IN
`444 `482
12 Months
Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 60.5 6.3 20.4 12.8
Abs. (%) Sensex Mphasis
3m (4.3)
1yr 1.3
3yr 25.0
(5.3) (25.7) 103.9
Srishti Anand
+91 22 3935 7800 Ext: 6820 [email protected]
Ankita Somani
+91 22 3935 7800 Ext: 6819 [email protected]
MphasiS | Event Update
Exhibit 1: Key assumptions

Particulars Revenue growth-USD terms (%) USD-INR rate Revenue growth-INR terms (%) EBITDA margin (%) Tax rate (%) EPS growth (%)
Source: Company, Angel Research
FY2012
FY2013
17.6 43.7 15.2 17.8 24.0 6.3
14.8 43.3 13.6 17.6 25.0 14.5
Exhibit 2: Change in estimates

FY2012E Parameter (` cr) Net revenue EBITDA Other income PBT Tax PAT Earlier Estimates Revised Estimates Variation (%) Earlier Estimates FY2013E Revised Estimates Variation (%)
5,771 1,007 171 1,076 258 818
5,916 1,055 139 1,088 261 827
2.5 4.8 (19.0) 1.1 1.1 1.1
6,560 1,127 236 1,241 310 931
6,722 1,186 203 1,262 316 947
2.5 5.2 (14.0) 1.7 1.7 1.7
Exhibit 3: One-year forward PE (x) chart

1,000 800 600
(`)
400 200 0
Feb-08
Feb-09
Feb-10
Nov-07
Nov-08
Nov-09
May-08
May-09
May-10
Nov-10
Feb-11
May-11
3x
Aug-08
Aug-09
Aug-10
Price
15x
12x
9x
6x
August 1, 2011
Aug-11
Exhibit 4: Recommendation summary

Company 3iInfotech Educomp Everonn HCL Tech Hexaware Infosys Infotech Enterprises KPIT Cummins MindTree Reco Neutral Accumulate Neutral Buy Neutral Accumulate Accumulate Accumulate Accumulate CMP Tgt. price (`) 40 329 566 486 92 2,809 135 188 418 444 55 354 1,134 780 392 (`) 45 415 578 3,200 145 206 445 482 69 424 1,368 419 Upside (%) 26.2 19.0 13.9 7.6 9.6 6.4 8.5 26.3 19.8 20.7 6.8 Target P/E (x) 8.0 14.0 11.5 20.0 9.0 12.0 11.0 11.0 10.0 11.0 22.0 16.0 FY2013 EBITDA (%) 21.5 46.7 33.5 17.9 15.1 30.6 16.1 16.1 13.3 17.6 13.8 19.5 28.9 18.3 18.7 FY2013E P/E (x) 3.4 6.3 13.4 11.8 12.0 17.6 8.3 11.2 10.3 9.8 7.9 9.2 18.2 13.8 15.0 FY2011-13E EPS CAGR (%) (4.3) 17.7 27.7 29.8 63.4 15.7 13.9 21.8 27.5 10.3 11.2 5.1 18.4 6.8 9.9 FY2013E RoCE (%) 12.0 16.4 15.5 18.1 16.8 24.7 15.2 20.6 16.9 17.7 12.4 16.6 30.2 14.9 13.8 FY2013E RoE (%) 15.1 17.0 16.7 23.8 17.8 22.7 13.4 17.7 15.4 17.0 16.6 15.4 31.3 15.6 19.8
Mphasis
NIIT^ Persistent TCS Tech Mahindra Wipro
Accumulate
Buy Buy Buy Neutral Accumulate
Source: Company, Angel Research; Note: ^Valued on SOTP basis
Profit and loss statement (Consolidated)

Y/E October (` cr) Net sales Cost of revenue % of net sales Gross profit % of net sales Selling and mktg. expenses % of net sales General and admin. exp. % of net sales Provision for doubtful debts EBITDA % of net sales Dep. and amortisation EBIT Interest income, net Other income, net Forex gain Profit before tax Provision for tax % of PBT PAT EPS (`) FY2009 FY2010 FY2011E FY2012E FY2013E
4,271 2,690 63.0 1,581 37.0 179 4.2 266 6.2 1 1,135 26.6 202 933 3 16 29 980 64 6.5 916 43.4
5,036 3,352 66.6 1,684 33.4 220 4.4 199 4.0 1,265 25.1 164 1,101 1 50 58 1,210 119 9.8 1,091 52.0
5,137 3,792 73.8 1,346 26.2 248 4.8 193 3.8 905 17.6 146 759 1 106 57 924 174 18.9 749 37.1
5,916 4,382 74.1 1,534 25.9 274 4.6 204 3.4 1,055 17.8 166 890 139 59 1,088 261 24.0 827 39.4
6,722 5,047 75.1 1,675 24.9 285 4.2 204 3.0 1,186 17.6 192 993 203 66 1,262 316 25.0 947 45.2
August 1, 2011
Research Team Tel: 022 - 3935 7800
E-mail: [email protected]
Website: www.angelbroking.com
DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.
Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered
MphasiS No No No No
Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors
Ratings (Returns):
Buy (> 15%) Reduce (-5% to 15%)
Accumulate (5% to 15%) Sell (< -15%)
Neutral (-5 to 5%)
August 1, 2011

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Event Update | IT

Abs. (%) Sensex Mphasis

(5.3) (25.7) 103.9

MphasiS | Event Update

Exhibit 1: Key assumptions

17.6 43.7 15.2 17.8 24.0 6.3

14.8 43.3 13.6 17.6 25.0 14.5

Exhibit 2: Change in estimates

5,771 1,007 171 1,076 258 818

5,916 1,055 139 1,088 261 827

2.5 4.8 (19.0) 1.1 1.1 1.1

6,560 1,127 236 1,241 310 931

6,722 1,186 203 1,262 316 947

2.5 5.2 (14.0) 1.7 1.7 1.7

Source: Company, Angel Research

Exhibit 3: One-year forward PE (x) chart

MphasiS | Event Update

Exhibit 4: Recommendation summary

Source: Company, Angel Research; Note: ^Valued on SOTP basis

Profit and loss statement (Consolidated)

MphasiS | Event Update

Research Team Tel: 022 - 3935 7800

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

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