Is HP helping or hurting Mphasis' future?

MUMBAI, INDIA: It's been close to 4 years since Bangalore-based Mphasis EDS became Mphasis - an HP company and started operating as an independent unit of the global IT giant Hewlett Packard (HP). Though HP has helped Mphasis significantly in its overall business, the problems faced by parent company HP may influence Mphasis' future growth prospects. And this situation has become one of the key concerns for investors and stakeholders.

Interestingly, Mphasis' relationship with HP is like "double edged sword." HP is not only the parent company of Mphasis but also is one of the biggest client. "Mphasis' relationship with HP (its largest shareholder and client) has been a double-edged sword. While it has helped the company build scale, HP's loss of market share and diversion of business towards its local subsidiary has slowed Mphasis' revenue growth," Barclays Research said in a latest report.

As much as 57 percent of YTD (year till date) FY12 revenues of Mphasis are linked to HP and with the parent company going through some turbulent times, Mphasis is likely to face more challenges ahead. However, Mphasis' CEO denied any impact caused by HP's troubled business but did point to the declining market share of HP.

"HP's recent acquisitions write-off has no impact on Mphasis. HP Enterprise Services revenue has declined in last few quarters and it is largely due to HP losing its market share," Ganesh Ayyar, Mphasis CEO, told CIOL over the phone. According to Barclays Research, a 10 percent projected decline in FY13 from HP would put pressure on margin levels of Mphasis and would face with huge challenge to overcome the revenue fall and find a replacement of HP's business.

Apparently, the non-HP business and income of Mphasis is not so significant. In the past two years, the non-HP business has grown around 29 percent yearly.

"At 44 percent of the total revenues (YTD FY12), Mphasis faces a tall task of getting this business to replace the HP related business, at the right pricing and margin terms, given the macro weakness," the report pointed on Mphais' non-HP business challenges and income.

Though Ayyar denied any kind of impact caused by HP's troubled business the fact remains that Mphasis' revenue highly hinges on HP business. But with 60 percent HP-owned stake, does Mphasis has full control on pricing and contract negotiations to boost its revenue? "Our strategy during last one year or so is to reduce dependency on HP business and focus more on our direct non-HP business channel. "70 percent came from HP by the end of FY10 and now after 2 years the revenue from HP is now 54 percent," Ayyar commented.

"There's no re-negotiations of pricing contracts. We have a board and we function independently. HP treats us independently and we take our decisions," Ayyar pointed.

Mphasis on Thursday reported a 5.1 percent rise in FY12 revenue to Rs. 5,357 crore against Rs.5,098 crore in last year. It's operating margins were up by 5.7 percent at Rs.877 crore over the previous year. The company said that its direct business against HP business has improved to 46:54 ratio with revenue of Rs. 2,391 crore compared to 38:62 ratio in FY11.

However Ayyar in terms of future expectation said, "By the end of 2013 we want our direct business channel to grow from 46 percent to 50 percent and in next 3 years our non-HP revenue should increase around 70-75 percent." For Mphasis it's not getting rid of the on-going dependency on HP's business a big challenge but the parent company's own-restructuring process is blocking up its road ahead.

"We believe that HP's own problems - ongoing restructuring of businesses and highly leveraged balance sheet (US$17bn of debt) - would prevent a parent buyback and potential delisting," Barclays Research said in the report. "We are not aware of what is HP's stand on the stock ratio or buyback plans," Ayyar commented.

Given the situation and risk factors, Barclays Research has put Mphasis in the underweight (UW) category along with Wipro. While Mindtree and HCL have moved to overweight (OW) category in comparison with Mphasis based on company's current weak business scenario.

Recently, Mphasis acquired a US based Digital Risk for $200 million but will it help to change company's fortune and fate?