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December 27, 2004 1

Annual Report Analysis

Mphasis BFL LtdStruggling for growth

Share Price Chart

BSE Code 526299NSE Code MPHASISBFLBloomberg Code BFL@INCMP Rs285Market Cap Rs22bn52week H/L Rs425/197Face Value Rs10

Share Holding Pattern

Shareholding pattern (%)Indian Institutional 8.5Foreign (Institutional & NRI) 22.7Public 12.8Others (Body corporates) 56.0

BackgroundMphasis is a global IT and BPO services provider to G2000 companies situatedaround the globe. It assists its clients in innovating and streamlining their businessprocesses by offering customized solutions for technology and operations outsourcing.Its management is led by its two main promoters, Jerry Rao (Chairman & CEO) andJeroen Tas (Vice Chairman). Both are former Citibank executives, who possessimmense knowledge in financial services domain and command technology leadership.The company’s clientele includes big names like Citigroup, JP Morgan Chase, ING,BNP Paribas, Rabobank, ABN-Amro, Deutsche Bank, ICICI, AIG Inc, CharlesSchwab, Compaq, NEC, Fedex, P&G, Johnson & Johnson, Singapore Airlines andmany other Fortune 500 clients. It has 20 client relationship management & projectdelivery offices that are located across 4 continents and 11 countries. The companycurrently employs more than 7,500 people. It has a strong quality culture which isreflected in ISO 9001, BS 7799 and SEI CMMi Level 5 certifications.

Business• IT servicesVertical focus Service portfolioBanking, Financial Services & Insurance (BFSI) ArchitectureRetail & Logistics Application development & integrationAirlines Application maintenance & supportTechnology Testing & deployment

The company’s IT services business though contributes almost 65% of the revenuesbut employs ~30% of the total employee strength. The software processes of thecompany are certified at SEI CMMi Level-5 by the Software Engineering Institute. Ithas in all 6 offshore development centres (ODC’s) with 5 located in India and 1 inChina. Apart from above services, the company also provides software processconsulting to other smaller IT companies and IT divisions of domestic and globalcorporations.

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• ITES/BPO servicesVertical focus Service portfolioRetail, Banking & Credit cards Sales & serviceInsurance Account receivablesLogistics Case handlingTechnology Brokerage UtilitiesTax & accounting Content management

Technical helpdesk

The BPO operations employ about 70% of the company’s employee strength whereasit contribute only ~35% of the company’s revenues. The company’s domestic contactcenters are located in Bangalore and Pune. These centres offer English languagesupport while its global center located in Tijuana, Mexico provide Spanish languagesolutions. The BPO cantres provide both voice and non-voice based services thoughthe share of the latter is very low at present. The company also provides servicesrelating to setting up and managing offshore processing centers of global corporationswho are not willing to outsource their process to third party BPO companies.

SubsidiariesThe company has in all 15 direct and indirect subsidiaries, the details of which aregiven below.

Subsidiaries % HoldingMphasis Corporation (Mphasis USA) 100Mphasis Deutschland GmbH (Mphasis GmbH) 91BFL Software Asia Pacific Pte Ltd (BFL APAC) 100Mphasis Australia Pty Ltd (MphasiS Australia) 100Mphasis Software and Services Ltd (Mphasis China) 100Kshema Technologies Ltd (Kshema) 100MbrokeR Inc. (MbrokeR) 100MbrokeR (India) Private Ltd (MbrokeR India) 100Mphasis Europe BV (Mphasis Europe) 100Mphasis Pte Ltd (Mphasis Singapore) 100Mphasis UK Ltd (Mphasis UK) 100Mphasis Software and Services Pvt Ltd (Mphasis India) 100Msource Holdings BV (Msource Netherlands) 100Msource Mauritius Inc (Msource Mauritius) 100Msource (India) Private Ltd (Msource India) 100

December 27, 2004 3


Revenue growth... driven by BPO and inorganic initiatives

Revenue Growth

0

1 ,000

2 ,000

3 ,000

4 ,000

5 ,000

6 ,000

7 ,000

F Y 0 2 F Y 0 3 F Y 0 4 H 1 F Y 0 5

0

1 0

2 0

3 0

4 0

5 0

6 0

7 0

R e v e n u e s y o y g r o w t h

Segmental Composition

0.0

20.0

40.0

60.0

80.0

100.0

FY02 FY03 FY04 H1 FY05

I T s e r v i c e s B P O

Source: Company Reports, IIL Research

Over the last two fiscals, the topline of the company had increased from Rs3.1bn toRs5.8bn representing a CAGR of 36.1%. In the first half of the current fiscal, therevenues have witnessed a growth of 35%. The growth momentum of the companyhas been led by robust growth witnessed by the BPO business (Msource). The BPOrevenues have witnessed a CAGR of 182% over the last two years, growing fromRs236mn to Rs1,9bn. On the other side, the IT services revenues have increasedfrom Rs2.9bn to Rs3.9bn, reflecting a CAGR of 16.5%. Due to huge discrepancy inthe growth rate of the two segments, the business composition has been shifting infavour of BPO, which now contributes ~37% of the revenues.

The growth in the BPO revenues is attributable to the management’s emphasis onscaling-up operations to meet the ever increasing volumes. This has been ably supportedby the consistency in billing rate near US12$ per hour. In the IT services segment, thegrowth was modest due to absence of significant volume growth with billing ratesbeing relatively stable at US$61-62/hour for onsite and US$19-21/hour for offshoreservices. Due to the sluggish growth in the IT services, the company was compelledto pursue inorganic growth recently. It acquired Onida Infotech, a SAP implementationarm of MIRC Electronics in Q4 FY04 and Kshema Technologies, a companyspecializing in embedded software and systems, in Q1 FY05.

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IT revenue mix...reflects domination

Vertical Mix

49 53 53 51 48

2928 31 29

27

22 19 16 20 25

0 %

2 0 %

4 0 %

6 0 %

8 0 %

1 0 0 %

F Y 0 2 F Y 0 3 F Y 0 4 Q 1 F Y 0 5 Q 2 F Y 0 5

B F S I R e t a i l & l o g i s t i c s T e c h n o l o g y


In the IT services segment, the company has been focusing on three key verticals;banking, financial services & insurance (BFSI), retail & logistics and technology. Thisis as per the strategy of the company to focus on few verticals so as to acquire deepdomain knowledge and provide tailor made solutions to the clients. If one looks at thevertical mix of the IT services revenues, the domination of BFSI is apparent. One ofthe reasons behind this could be the expertise and experience of the promoters in thisfield due to their association with Citibank for years. However, this domination seemsto be tapering off as the share of other services have been rising in the last twoquarters.

Project Type Mix

0

20

40

60

80

100

FY03 FY04 Q1 FY05 Q2 FY05

T & M F P / F T

Delivery Mix

0

20

40

60

80


O n s i t e O f f s h o r e


The time & material (T&M) contracts constitute majority of the revenues. In the lasttwo quarters, their share has actually risen from 75% in FY04 to 82% in Q2 FY05.The lower contribution from the fixed price & fixed time contracts augurs well for thecompany as it involves the risk of cost overruns and completion delays thereby makingit less preferable from the vendor’s point of view. The onsite-offshore mix with onsiterevenues forming 60+% and offshore revenues contributing less than 40% of therevenues. Recently, the mix has shifted marginally in favour of offshore.

December 27, 2004 5


BPO revenue mix... shifting for betterBPO Service Mix

9 7 9 28 5 8 6

81 5 1 4

3

0

2 0

4 0

6 0

8 0

1 0 0

F Y 0 3 F Y 0 4 Q 1 F Y 0 5 Q 2 F Y 0 5

V o i c e N o n - v o i c e


The BPO revenue mix is highly in favour of voice based services that consist ofinbound and outbound call center services. Non-voice services mainly comprisingtransaction processing and back office operations have a miniscule share. The mix isgradually shifting towards non-voice with some initiatives from the company. Themanagement has expressed intentions of increasing the share of non-voice servicesand as a step towards this, it has started providing tax & accounting and equityresearch services to its clients.

Operational performance... managing by balancing SG&A & staff

costCost Analysis

0

10

20

30

40

50

FY02 FY03 FY04 Q1 FY05 Q2 FY05S t a f f C o s t l e v e l G r o s s M a r g i n

S G & A l e v e l O P M

Segmental EBIT Margin

0

10

20

30

40

50

FY02 FY03 FY04 Q 1

FY05

Q 2

FY05



The movement in the margins of the company has not been unidirectional but ratherrange bound. The staff cost has gone up in the last one year as the company undertooklarge-scale recruitment, especially for its BPO operations, and conducted regularsalary revisions so as to retain its resources. The company conducted its yearly salaryhike in April 2004. The other direct cost increased in line with the sales, mainly led bysharp increase in telecom and infrastructure cost incurred for ramping up BPOoperations. The gross margin arrived after deducting the above two cost, has graduallydecreased from 41.8% in FY02 to 37.4% in Q2 FY05.

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Between FY02 & FY04, the selling, general& administration expense (SG&A) aspercentage of sales declined, reflecting the operating leverage derived by the company.Since then, the SG&A level have been on the rise mainly attributable to addition ofcost relating to the recent acquisitions. The current OPM of 19.4% is at the higherend of the company’s historic range.

Though the segmental EBIT margins cannot be used (in the company’s case) to judgethe individual operating performance of the segments due to presence of hugeunallocated cost, but it surely indicates lower margin earned in BPO vis-a-vis ITservices.

Net profit growth robust... but buoyed by non-operational gains

recently

Net Profit Growth

0

2 0 0

4 0 0

6 0 0

8 0 0

1 ,000

1 ,200

F Y 0 2 F Y 0 3 F Y 0 4 H 1 F Y 0 5

02 04 06 08 01 0 01 2 01 4 01 6 01 8 02 0 02 2 0

N e t p r o f i t s y o y g r o w t h

Profitability Ratios

0.0

10.0

20.0

30.0

40.0

50.0

FY02 FY03 FY04

N e t M a r g i n R O C E R O N W


There has been a consistent growth in the net profits of the company but the drivershave been different. The net profit witnessed a CAGR of 55.4% in the last two years,rising from Rs408mn in FY02 to Rs986mn in FY04. The net profit growth has beenconsistently out performing the sales growth. The net profit growth in FY03 wastotally operationally driven while that in FY04 was driven by huge forex gains ofRs147mn on hedged receivables (as the Rupee appreciated sharply) and lower taxoutflow due to reinstatement of income tax holiday partially withdrawn in FY03.Further, the company enjoyed deferred tax asset in the range of Rs28-32mn in eachof the first two quarters of current fiscal, arising from restructuring of its US operations.The net profit margin as improved steadily from 13% in FY02 to 17% in FY04.

The return ratios (RONW & ROCE) have shot up in the last year. This is mainly dueto reduction in net worth of the company rather than growth in net profits. In FY04,the company obtained an approval from the Karnataka High Court and Registrar ofCompanies to reduce the share premium account by Rs7.1bn. On the asset side, itwas applied towards goodwill in Mphasis Corporation (USA) and MphasisDeutschland (Germany).

December 27, 2004 7


Client Addition... satisfactory, Concentration... concern

Client Addition

3 0 3 2 3 5

2 5

9 85

3

0

10

20

30

40

50

FY02 FY03 FY04 H1 FY05


Top Client contribution

0

5

10

15

20

25

30

35


I T B P O


The client addition numbers has been decent with total client addition number beingaround 40 in each of the last two years. In HI FY05, the company has already added28 clients representing an improvement over last year. The BPO client addition hasbeen relatively lower but the revenue from this segment has been rising at a far superiorpace then IT services. This implies that the company is having more number of largeaccounts in this segment and has been able to mine it successfully, which is not thecase with IT services.

The top client concentration of revenues is higher in both the segments, at 17% for ITservices and 16% for BPO operations. Though the concentration has declined to anextent in both segments, even the present levels make the company highly vulnerableto the activities of the top client.

Manpower addition... higher on the BPO side

Manpower Addition

263

677

372

1696

727

1882

527

0

500

1000

1500

2000

2500

FY02 FY03 FY04 H1 FY05I T s e r v i c e s B P O


The trend in manpower addition reflects the company’s confidence and visibility offuture business. The company’s manpower addition has been strong in the last twofiscals and reflected a CAGR of 99%. Most of the recruitment in each year has beendone for Msource (BPO operations) so as to meet its expanding scale of operations.

December 27, 2004 8


In FY03, the net additions in the IT services segment were almost nil (3). Since then,the additions in this segment have picked as the company is in the process of increasingits presence outside India, by expanding its global pool of resources. In H1 FY05,the company added net 990 people, less than 50% of total FY04 number. At the endof Q2 FY05, the total manpower strength stood at 7,268; 2,258 in IT services and5,010 in BPO.

Rise in share capital... attributable to company’s generosityThe share capital of the company has increased four-fold from Rs172mn in FY02 toRs772mn at the end of H1 FY05. The main reason for this is declaration of bonusshare in the ratio of 1:1 in two consecutive years, FY03 and FY04. Apart from this,exercise of ESOPs by employees and issuance of equity shares as a part considerationfor acquiring Kshema (Q1 FY05) and minority interest in Msource Corporation (Q2FY05) led to increase in share capital. In Q2 FY05, the company issued 2.3mn and2.4mn equity shares to the shareholders in Kshema and the holders of minority interestin Msource Corporation respectively. The nominal share capital of the company hasbeen increased from Rs400mn to Rs1bn in Q1 FY05.

Addition to gross block... BPO more capital intensive than IT

servicesThe gross block of the company has almost doubled increasing from Rs976mn inFY02 to Rs2bn in FY04. A large part of the incremental capital expenditure has beenutilized for expanding and developing BPO facilities of the company. In FY03, thecompany set up a call center in Mexico to provide BPO services in Spanish language.During the last two years, it also increased the number of seats in its domestic centresin Bangalore and Pune. On the IT services side of the company, a new overseasdevelopment center (ODC) was developed in Mumbai in FY03 and further expenditurewas incurred on it and China ODC in FY04.

December 27, 2004 9


Working capital... improving, Liquidity... comfortableLiquidity & Cash position FY02 FY03 FY04Working Capital (A) 1,475 1,867 2,773A as % of sales 47.1 43.5 47.8Cash & cash equivalents (B) 1,000 1,470 1,326B as a % of WC 67.8 78.7 47.8Core WC (A-B) as a % of sales 15.2 9.2 24.9Cash per share 58.3 84.9 37.4Debtor days 87 96 99


The company’s working capital (WC) has been in the range of 44%-48% of sales inthe last three years implying that its growth has been in line with that of the revenues.Further, if one excludes cash & cash equivalents (C&CE) from total WC, then thecore working capital of the company stands lower at 24.9% of sales in FY04. Afterhaving a high debtors level in the end of FY04 at 99 days, the company workedtowards it by implementing a stricter credit policy and improving efficiency in collections.This resulted into debtor level declining sharply to 54 days at the end of Q2 FY05.The company has been enjoying comfortable liquidity as reflected by the huge C&CEbalance carried by it. Even after paying for the couple of acquisitions and minorityinterest holders (in Msource Corporation), the company has C&CE of Rs1bn at theend of Q2 FY05, which translates into cash per share of Rs13. The cash generatedfrom operations during FY04 stood at Rs1.18bn, 20% of the years’ revenues.

December 27, 2004 10


OutlookConcerns• The consistent growth of 35-36% achieved by the company stands a tad lower thatthe industry growth rate of 40%+ recorded by mid-size plain IT services companies.If one considers that a significant portion of the revenues come from BPO operations,which is a relatively high growth segment than IT services, the marginalunderperformance gains further significance.• The sequential growth in the last three quarters, which was in the range of 8-10% inIT services, is mainly attributable to the acquisitions (Onida Infotech & KshemaTechnologies) done by the company in the respective periods. Excluding acquisitions,the organic sequential growth stands lower in the range of 3-4%.• The growth in BPO business, which the company is banking upon, has sloweddown, which is reflected in the declining sequential growth in the last three quarters.• The company’s narrow vertical focus can be a concern in a scenario where a broadbased portfolio of services and larger vertical presence is required to mine existingclients and add new ones.• The onsite-offshore mix of 63:37 stands unfavorable in relation to the industrystandard of 55:45. The companies tend to earn higher margin from offshore revenuesvis-à-vis onsite revenues.• OPM at the lower band of the industry range. The main lever for OPM improvementwill be the SG&A leverage but gains will be limited to a large extent by increase instaff cost and adverse forex movement.• The profitability in the last two quarters has been aided by deferred tax asset arisingon restructuring of company’s US operations. The net profit will receive a set backonce this benefit goes off.• The top client (most probably Citibank) concentration stands higher. The companyruns the risk of scaling down operations by this client as it has its own BPO operationsin India.• Slow down in employee addition in H1 FY05. This is at a time when other companiesare at the peak of their recruitment cycle.

Positives• The company is banking on the BPO growth, where the margins have started toimprove.• Huge potential accompanied by company’s intention to increase the share of non-voice based services will work well for the company. Non-voice services are lesscommoditised and command the margins than Call center (voice based) services.• High C&CE balance coupled with huge cash generation from operations will enablecompany in employing it towards growth initiatives both, organic and inorganic.• The management has a track record of sharing company’s progress with itsshareholders.



Income statement

Balance sheet

Period FY02 FY03 FY04(Rs mn) (12) (12) (12)Net Sales 3,133 4,293 5,806Operating expenses (2,650) (3,392) (4,689)Operating profit 483 900 1,117Other income 76 36 186PBIDT 559 936 1,303Interest (1) (2) (1)Depreciation & Amortization (128) (147) (248)Profit before tax (PBT) 430 787 1,054Tax (9) (118) (69)Profit after tax (PAT) 420 669 986Minority interest (1) 0 0Extraordinary / prior period items (11) 0 0Adjusted profit after tax (APAT) 408 669 986

Period FY02 FY03 FY04(Rs mn) (12) (12) (12)SourcesShare Capital 172 173 354Reserves 8,697 9,363 3,138Net Worth 8,868 9,536 3,492Employee stock option outstanding 30 23 15Minority interest 81 329 375Loan Funds 24 27 27Def Tax liability 0 0 0Total 9,002 9,915 3,908UsesGross Block 976 1,539 2,025Accd Depreciation (665) (824) (1,086)Net Block 312 715 939Capital WIP 61 122 107Total Fixed Assets 373 837 1,047Goodwill 7,130 7,195 70Investments 0 0 0Total Current Assets 1,889 2,488 3,453Total Current Liabilities (414) (620) (681)Net Working Capital 1,475 1,867 2,773Def employee stock compensation exp 11 4 1Def Tax assets 14 11 18Total 9,002 9,915 3,908



Cash flow statementYear 03/03 03/04P(Rs mn) (12) (12)Cash from operating activities 796 1,182Add/less working capital changes (449) (2)Net cash from operating activities 346 1,180Net Cash from investing activities (652) 6,708Net cash from financing activities 68 (7,090)Net increase in cash and cash equivalents (238) 797Cash at start of the year 652 414Cash at end of the year 414 1211

Key ratios

Published in December 2004. © India Infoline Ltd 2003-4.India Infoline Ltd. All rights reserved.Regd. Off: 24, Nirlon Complex, Off W E Highway, Goregaon(E)Mumbai-400 063. Tel.: +(91 22)5677 5900 Fax: 2685 0585.This report is for information purposes only and does not construe to be any investment, legal or taxationadvice. It is not intended as an offer or solicitation for the purchase and sale of any financial instrument. Anyaction taken by you on the basis of the information contained herein is your responsibility alone and IndiaInfoline Ltd (hereinafter referred as IIL) and its subsidiaries or its employees or directors, associates will not beliable in any manner for the consequences of such action taken by you. We have exercised due diligence inchecking the correctness and authenticity of the information contained herein, but do not represent that it isaccurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any way responsiblefor any loss or damage that may arise to any person from any inadvertent error in the information contained inthis publication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiariesand/or directors, employees or associates may have interests or positions, financial or otherwise in the securitiesmentioned in this report.

Period FY02 FY03 FY04(12) (12) (12)

Per share ratiosEPS (Rs) 23.6 38.5 27.8Div per share 1.5 3.0 3.0Book value per share 517.1 550.9 98.6Valuation ratiosP/E 12.1 7.4 10.3P/BV 0.6 0.5 2.9EV/sales 1.4 1.1 1.5EV/ PBIT 9.9 5.8 8.4EV/PBIDT 7.6 4.9 6.8Profitability ratiosOPM (%) 15.4 21.0 19.2PAT (%) 13.0 15.6 17.0ROCE 7.7 11.3 44.1RONW 4.6 7.0 28.2

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