The shares of MphasiS, an IT services and BPO company that Hewlett Packard (HP) bought in 2008, fell 29 per cent on Friday. This was after it reported a 15.5 per cent fall in net profit for the quarter ended January 31 due to massive discounts to HP customers.
“We are cutting financial year 2011-12 earnings estimate by 25-27 per cent, but MphasiS’ financial performance is now peripheral to the central issue of the shocking collapse in its governance standards,” said a report by Nimish Joshi of CLSA, a foreign brokerage group.
The fact that HP used its 2008 acquisition of MphasiS for own expansion disappointed analysts. In 2003, Digital Globalsoft, an outsourcing company HP bought, had also faced pricing pressure, said analysts.
“HP has been here before with a similar experience faced by investors in Digital Globalsoft. After this result, the harm done to not only MphasiS’ but also HP’s reputation is likely to be long-lasting,” it said.
The stock closed at Rs 448.40. It hit a 52-week low intra-day at Rs 443. The company cut rates for its largest shareholder’s clients as customers demanded lower prices during the “traditionally weak” quarter, Chief Financial Officer Ganesh Murthy told Reuters in Bangalore on Friday.
This, analysts say, has been made worse by a disappointing performance. MphasiS’ peer companies have done better than expected, despite this being a ‘traditionally weak quarter’ due to more holidays.
“Massive price cuts from HP (68 per cent of revenues) drove an 8.5 per cent quarter-on-quarter decline in dollar revenues to $271 million. In our view, HP’s interests as a customer will continue to hold precedence over its interests as a shareholder in MphasiS,” said the CLSA report.
“That will likely reflect in continued pricing pressures. Moreover, we believe that HP will continue to use MphasiS as a vehicle for acquisitions and capacity expansions abroad (Sri Lanka centre has being opened) at the expense of MphasiS’ minority shareholders,” it said.
The company reported a 10 per cent fall in HP channel revenues to Rs 840 crore, while its direct channel revenues declined three per cent to Rs 380 crore.
MphasiS, which follows the November to October cycle, reported a net profit of Rs 226.7 crore, down from Rs 268.3 crore in the corresponding quarter last year. On a sequential basis (compared to the trailing quarter), the net profit slipped by 20.2 per cent.
The revenue grew 7.7 per cent at Rs 1,233.5 crore on a year-on-year basis. It fell 8.3 per cent on a sequential basis.
Attempts made to contact Ganesh Ayyar, the chief executive officer, failed. His office said he was not available.
The company’s earnings before interest and tax margins fell 300 basis points quarter-on-quarter (despite provision reversals of Rs 430 million) as price reductions from HP took a toll on profitability, said the report.
Analysts were also surprised as the company had not issued any prior warning. “A decline of about nine per cent in dollar revenues in a buoyant economic environment was surprising, especially when the company was on a steady growth path over the last several quarters. The company had not indicated any challenges on the growth front at the recent analysts’ meet,” said an IDFC Securities report. IDFC Securities has downgraded the company from “outperformer” to “underperformer.”
