MphasiS: Not Mphatic at all

MphasiS' inferior performance should not be viewed as a trend for the industry

MphasiS may be the first among software companies to announce quarterly results, but it certainly doesn't set the trend for the industry.

The company's IT services division reported a four per cent drop in revenues and a 28 per cent drop in net profit sequentially. This led to a seven per cent drop in the MphasiS stock.

The inferior performance was mainly due to problems unique to the company. MphasiS admitted that its IT services operations were not run efficiently, in terms of having the right resources at the right place.

As a result, although client acquisitions were decent in the past few quarters, these new clients didn't ramp up operations at a fast enough pace.

The BPO business, interestingly, reported margins (both at the gross and net profit levels) that were higher than that of the mainstay IT services business.

Also, despite the fact that the BPO business accounted for less than 40 per cent of total revenues, its net profit was higher than that of the IT services business (for the first time ever). While that's a sign that MphasiS is increasingly becoming a BPO company, it certainly doesn't mean that its BPO business is doing very well.

Its sequential growth was just 5.2 per cent, much lower than the double digit growth in the past three quarters. Besides, revenue growth was driven by its top client, who accounted for 97 per cent of incremental revenues. Its next four biggest clients reported a 12 per cent sequential drop in revenues.

Yet, MphasiS's consolidated operating profit wouldn't have fallen as high as 24 per cent if it wasn't for a four per cent appreciation in average rupee rates last quarter.

Although the company didn't give details, its profitability was hit severely on this count. Needless to say, the impact of the rupee appreciation in the December quarter would be key figure to watch out for most IT companies.

Centurion Bank

The Centurion Bank stock fell 9.3 per cent on Tuesday, compared with a 1.6 per cent decline in the Bankex. The bank's third quarter results, announced on Monday, were excellent, with net profit growing 35 per cent on a quarter-on-quarter basis.

Growth in operating profit was even higher at 89 per cent, compared to the second quarter. And diluted earnings per share for the quarter was Rs 0.07, the same as at the end of Q2, although equity capital has increased from Rs 56.75 crore at the end of Q2 to Rs 79.44 crore at the end of Q3, thanks to a rights issue.

In other words, the bank has been able to support earnings at the same level in spite of a 40 per cent dilution in equity.

The bank has also been able to raise its net interest income, which went up from Rs 42.94 crore in Q2 to Rs 45.84 crore in Q3. Its net spread has risen to a very high 4.76 per cent, from 4.3 per cent in Q2.

Retail assets grew 13 per cent quarter-on-quarter, and it will start mortgages from the current quarter. Non-performing assets have declined marginally from 3.41 per cent to 3.36 per cent.

An issue close to the market price will dilute equity by around 25 per cent. Nevertheless, the sheer size of the proposed equity issue "" Rs 300 crore "" is a dampener for the stock.

Further, the share has appreciated by almost 100 per cent since the beginning of December, and its valuations were hard to justify. All these factors led to the sharp correction on Tuesday.

Tata Finance merger

With the merger ratio of one share of Tata Motors for every 12.5 shares of Tata Finance being well below the ratio of the scrips' respective closing prices on Monday, it was no wonder that the Tata Finance stock was stuck at the lower circuit on Tuesday. In fact, the stock still has some distance to go before it conforms to the set exchange ratio (see chart).

Analysts, however, voiced the opposite concern "" that Tata Motors may have paid too high a price for the auto financier.

Analysts' worries were based on the 4 times book and around 20 times annualised current year's earnings paid by Tata Motors, particularly since the Tata Motors management clearly stated that Tata Finance had no future as a standalone company in an environment of increasingly cut-throat competition from banks. The Tata management's defence was that the value of Tata Finance's franchise exceeded the mere book numbers.

The merger will result in equity dilution of only around 4 per cent for Tata Motors, but there will be tax benefits consequent upon the Rs 515 crore of accumulated losses as at March-end 2004 being set off against profits.

Tata Motors will take over Rs 1200 crore worth of liabilities, but it will endeavour to repay that and get its debt-equity ratio back to current levels within a year.

The benefit for Tata Motors will be that financing for its trucks and cars can now be at competitive rates, which was difficult earlier given Tata Finance's high 8.5 per cent cost of borrowing.

That, according to the management, together with other synergies, should drive vehicle financing within Tata Motors to 45 per cent of its vehicles business within 3 to 4 years. Putting that in perspective, General Motors's financing arm contributes 50 per cent of GM's bottomline.

With contributions by Mobis Philipose