Mphasis - Acquisitions

MphasiS acquisition: Our view

Recently, MphasiS BFL has acquired two companies Princeton Consulting in the UK, and Eldorado Computing Inc in the US. In this article, we analyse the impact of the same on the company.

What is the company's business?
MphasiS BFL is a mid-sized player in the Indian technology marketplace. It is a sort of a niche player in the sense that it is the only Indian technology company that obtains a major portion of its revenues from the BPO business. MphasiS has a broad range of service offerings, which includes IT consulting, architecting solution, development & maintenance of applications, transformation of legacy systems, application life cycle maintenance (ALCM), enterprise application integration (EAI) and testing. The foray into new businesses/verticals will help MphasiS to derisk its business model and grow in size.

Inorganic growth initiatives to fuel growth
The recent acquisitions are in line with the company¿s strategy to derisk its business model. This will enable it to reap the benefits of increased work being outsourced to India, a fair part of which is expected to come to Indian shores.

Princeton Consulting
MphasiS acquired Princeton Consulting in the UK in February 2005 for a consideration of GBP 7.73 m and after adjusting for the surplus cash of GBP 3.23 m in Princeton, the net consideration comes to GBP 4.5 m. Princeton Consulting is a profitable company with annual revenue in excess of GBP 6 m. Princeton Consulting has about 100 employees and its list of clients includes British Telecom, Marks & Spencer, Deutsche Telekom, Belgacom, Volvo, and Ford.

Benefits for MphasiS
The acquisition provides MphasiS access to high-level business process management consultancy skills, as well as an established list of globally renowned clients, thus, giving the company greater visibility. In terms of revenues, as mentioned above, Princeton Consulting has revenues in excess of GBP 6 m, which is approximately Rs 500 m. This will add around 6.9% to MphasiS¿ estimated FY05 revenues of Rs 7,232 m.

Eldorado Computing Inc
MphasiS acquired Eldorado Computing Inc in the US for a consideration of US $ 16.5 m in an all-cash deal. Eldorado Computing, a profitable entity with revenues of over $10 million, specializes in claims processing and benefit management solutions for the health insurance industry. With 128 clients representing 2.5 million members, the company is a leader in technology administration solutions for healthcare payers.

Benefits for MphasiS
The acquisition will enable MphasiS to strengthen its footprint in the US market and enable it to enter the healthcare insurance and payment market. The company will also be able to offer these services to a larger client base in the US through its global delivery capabilities. In terms of revenues, as mentioned above, Eldorado Computing has revenues of over US$ 10 m, which is around Rs 435 m. This will add another 6% to MphasiS estimated FY05 earnings of Rs 7,232 m.

Our view
Both the acquired entities will together account for Rs 935 m in revenues, adding almost 13% to estimated FY05 revenues for MphasiS. Both the acquisitions will be immediately EPS-accretive, hence, there will be an addition to the topline and bottomline from this quarter itself. We had recommended MphasiS BFL in our StockSelect section in February 2005 as a buy with a target price of Rs 360. Given the positive effects of these acquisitions on MphasiS, we maintain our BUY recommendation on the stock with a two to three year perspective.