Mphasis’ Struggle for Growth Continues

Mphasis shares have outperformed the Nifty IT index by 24 per cent from Blackstone Group LP disclosed its acquisition in April this year. Thus far, investors’ enthusiasm about the change in ownership hasn’t translated into a meaningful improvement in performance. On the other hand, Mphasis has continued to struggle for growth.

In the last quarter, revenues declined 5.3 per cent y-o-y in dollar terms to $224.1 million, faring worse than the June quarter, when revenues had dipped by 4.1per cent. According to the company, its direct international business was affected by one client, which reduced business because of cost optimization measures.

The direct international business indicates to work Mphasis receives from sources other than Hewlett Packard Enterprises (HPE), its erstwhile parent company, excluding the domestic business process outsourcing business.

In the September quarter, the direct business increased just 2.8 per cent on a y-o-y basis, down from the 8.6 per cent growth in the June quarter. Within this business, the so-called direct mature business segment has also faced a drop in growth rates.

Considering that this is the chief growth engine for the company, the sharp deceleration isa matter to worry. The silver lining in the results was that business from HPE rose 1.9 per cent sequentially in dollar terms last quarter as compared with a 4.2 per cent fall in the June quarter. The company’s post-results commentary indicates that the HP business has bottomed out and that it anticipates moderate growth from this segment in the coming quarters. But, clearly, no one’s expecting this segment to drive growth.

Unless the direct international business gives signs of a recovery, investors would start questioning the out performance Mphasis shares have enjoyed this year. Mphasis share price is trading below 2 per cent at Rs. 509.85. The stock opened at Rs. 479.00 against its previous close at Rs .515.60. Mphasis is one of the top 500 performing stocks for this quarter as identified by Dynamic Levels.