Mphasis faces an uphill task as revenue from HP channel shrinks

 

The latest quarterly financial performance of MphasiS BSE -1.19 % shows that the Bengaluru-based IT exporter is still a few quarters away from reporting steady growth in business. While its recent acquisition Digital Risk is expected to add to revenues from the April quarter, business from HP, the parent, will be weak. 

Revenue growth remains a challenge for MphasiS. In the three months to January 2013, which is the first quarter of its financial year, the company's revenue fell 3.8% sequentially to Rs 1,257 crore. 

Though the company attributed this decline to fewer working days during the period encompassing the festive season, at 8.1%, the fall was even sharper on a year on-year basis. This reflects a continuing slowdown in the business from its parent HP. 

Revenue from 
HP shrank to Rs 6,597 crore in the January quarter from Rs 7,257 crore in the previous quarter and Rs 8,121 crore in the year-ago quarter. The company's hopes now hinge on how well it can grow the non-HP business, which the company identifies as the direct channel. The share of the direct channel revenue in total revenue grew to 48% from 42% a year ago. 

The newly acquired Digital Risk, which has the potential to add over about Rs 820 crore every year to MphasiS' revenue, will be critical in supporting top-line growth in the coming years. 

However, any positive impact from such new business will take time to reflect in overall growth since the business from HP still contributes 52% to total revenue. Over the past year, the number of clients MphasiS lost from the HP channel was more than the previous year's across segments. 

The number of client accounts from the HP channel, which generates up to $1 million in revenue, fell to 71 from 80 a year ago. In the $20-million category, the number of accounts has fallen to four from seven. 

The decline may continue in the future since HP itself is struggling to boost revenue and profits. HP's revenue fell 6% year-on-year in the January 2013 quarter. Though the company reported better earnings per share, it is too early to predict a turnaround.