Mphasis BFL: Plum gains

THE COMPASS

 After the US-based EDS acquired a controlling stake in Mphasis and subsequently merged EDS India and Mphasis, the June 2007 quarter was the first time the company reported consolidated earnings. A sequential top line growth of 14 per cent in dollar terms and 5.5 per cent in rupee terms was impressive.

However, the operating profit growth was slower at 0.4 per cent and this was before the rupee appreciation. After the rupee appreciation is factored in, operating profit declined by 11 per cent. The operating margin was lower by 64 basis points q-o-q before the rupee impact to 12.65 per cent, and nearly 200 basis points after the rupee appreciation to 10.67 per cent. A wage hike for more than half of its staff during the quarter was also responsible for the lower margins.

Including EDS India, the company has added 2,058 employees over the previous quarter, and it added six new clients, and ten existing clients of EDS. It also benefited from a 7.6 decline in selling costs, aided by the stronger rupee. Revenues from its key business, application services, grew a smart 7.6 per cent q-o-q in rupee terms, and helped the company's overall growth. Infrastructure outsourcing revenues were up 5.9 per cent, but this business has strong prospects. However, BPO services revenues declined by 0.2 per cent.

The EDS relationship will help the company with an assured flow of business going forward due to higher offshoring. It will add about 10,000 employees in 2007. EDS India has added almost 50 per cent to Mphasis' standalone revenues in the June 2007 quarter. Its annual revenues run rate is at $0.5 billion, which is about twice the company's FY07 revenues before the merger. The margins are likely to improve due to scale benefits. The stock trades at 21 times estimated FY08 earnings, and could have some upside.

Apollo Tyres: Rubber effect

Apollo Tyres reported an improved performance in the June 2007 quarter helped by a decline on a y-o-y basis in rubber, its key raw material prices. As a result, standalone operating profit grew 76.9 per cent y-o-y to Rs 100.5 crore in the last quarter, while net sales expanded 15.4 per cent to Rs 874.1 crore. Its operating profit margin also expanded 400 basis points y-o-y to 11.5 per cent in Q1 FY08.

Apollo Tyres, like other players in the tyre sector, benefited from spot rubber prices that averaged Rs 85.7 per kg levels in the June 2007 quarter compared with an average price of Rs 98 a kg a year earlier. As a result, adjusted raw material costs, as a percentage of net sales, declined 455 basis points y-o-y to 64.2 per cent in Q1 FY08. Meanwhile, Apollo Tyre's subsidiary, Dunlop South Africa, reported sales of Rs 275 crore in the June 2007 quarter, a growth of 47.2 per cent y-o-y.

Going forward, the direction of rubber prices will continue to play a crucial role in determining Apollo Tyre's profitability. At Rs 390, the stock trades at 11 times estimated FY08 earnings.