Source: Economic Times(http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/mphasis-scrip-hammered-over-price-cut-issues-with-hp/articleshow/7578006.cms)
Shares of MphasiS, the software firm owned by Hewlett Packard (HP), suffered their biggest-ever fall on Friday after outraged investors questioned the company’s corporate governance standards after it cut prices on contracts awarded to its parent.
Bangalore-based MphasiS shares fell 28%, the worst performance since its listing in 1994, to Rs 449.30. The company unveiled results on Thursday showing a 20% fall in net profit for the first quarter and a 8% fall in sales. The results, according to many analysts, could be attributed to the price cuts given to its parent HP on select contracts.
“MphasiS’ performance is now peripheral to the central issue of the shocking collapse in its governance standards. Post this result, the harm done to not only MphasiS’ but also HP’s reputation is likely to be long lasting,” CLSA analysts, Nimish Joshi, Bhavtosh Vajpayee and Arati Mishra said in a scathing report.
The controversy revived memories of a similar firestorm that erupted in 2003 when HP acquired Digital Globalsoft through its global purchae of Compaq. In 2003, Digital Globalsoft (then a HP-owned listed entity) went through a phase of price cuts from HP before the parent ended up buying the minority shareholders and delisting the company.
Around 70% of MphasiS’ revenue come from HP. About 10% is from projects it does for HP and the remaining 60% is through sub-contracting work. The pricing decline is in some of these projects which it does for HP’s customers. MphasiS sought to reassure investors that the poor performance can only be partially blamed on the price cuts.
MphasiS CEO Ganesh Ayyar said there was no reduction in its rate card with HP, the pre-negotiated billing rates based on which it does projects for HP, but only a reduction for select contracts that are on an end-user pricing driven model.
Revenue drop not linked to price cut
“We have followed a strict governance model when it comes to the rate card with HP,” he said. The payment, he said, is not a one-off because it is related to the achievement of a milestone. “The revenue drop has very little to do with the price reduction,” he said.
The company, among the first mid-sized Indian IT firms to cross the billion-dollar mark, has seen three successive quarters of margin decline and analysts on Friday were not buying Mr Ayyar’s argument. “Unlike its much larger peers, MphasiS, the India-based SI (systems integrator) majority-owned by HP, continues to march steadily backwards. The trend is in line with parent HP’s poor services performance in the same quarter, where services revenues went backwards as did margins. It sounds like HP’s service wheels are getting a bit wobbly,” said Anthony Miller, an analyst with TechMarketView.
MphasiS posted a net profit of Rs 227 crore, a 16% drop over the year-ago quarter and a drop of 20% quarter-on-quarter. Its revenues grew by 5% over the year-ago period, but dropped sequentially to Rs 1216 crore. In comparison, the Indian IT services industry grew 23% in the last 12 months. In dollar terms, the revenues declined 8.5% sequentially to $ 271 million
Shares of MphasiS, the software firm owned by Hewlett Packard (HP), suffered their biggest-ever fall on Friday after outraged investors questioned the company’s corporate governance standards after it cut prices on contracts awarded to its parent.
Bangalore-based MphasiS shares fell 28%, the worst performance since its listing in 1994, to Rs 449.30. The company unveiled results on Thursday showing a 20% fall in net profit for the first quarter and a 8% fall in sales. The results, according to many analysts, could be attributed to the price cuts given to its parent HP on select contracts.
“MphasiS’ performance is now peripheral to the central issue of the shocking collapse in its governance standards. Post this result, the harm done to not only MphasiS’ but also HP’s reputation is likely to be long lasting,” CLSA analysts, Nimish Joshi, Bhavtosh Vajpayee and Arati Mishra said in a scathing report.
The controversy revived memories of a similar firestorm that erupted in 2003 when HP acquired Digital Globalsoft through its global purchae of Compaq. In 2003, Digital Globalsoft (then a HP-owned listed entity) went through a phase of price cuts from HP before the parent ended up buying the minority shareholders and delisting the company.
Around 70% of MphasiS’ revenue come from HP. About 10% is from projects it does for HP and the remaining 60% is through sub-contracting work. The pricing decline is in some of these projects which it does for HP’s customers. MphasiS sought to reassure investors that the poor performance can only be partially blamed on the price cuts.
MphasiS CEO Ganesh Ayyar said there was no reduction in its rate card with HP, the pre-negotiated billing rates based on which it does projects for HP, but only a reduction for select contracts that are on an end-user pricing driven model.
Revenue drop not linked to price cut
“We have followed a strict governance model when it comes to the rate card with HP,” he said. The payment, he said, is not a one-off because it is related to the achievement of a milestone. “The revenue drop has very little to do with the price reduction,” he said.
The company, among the first mid-sized Indian IT firms to cross the billion-dollar mark, has seen three successive quarters of margin decline and analysts on Friday were not buying Mr Ayyar’s argument. “Unlike its much larger peers, MphasiS, the India-based SI (systems integrator) majority-owned by HP, continues to march steadily backwards. The trend is in line with parent HP’s poor services performance in the same quarter, where services revenues went backwards as did margins. It sounds like HP’s service wheels are getting a bit wobbly,” said Anthony Miller, an analyst with TechMarketView.
MphasiS posted a net profit of Rs 227 crore, a 16% drop over the year-ago quarter and a drop of 20% quarter-on-quarter. Its revenues grew by 5% over the year-ago period, but dropped sequentially to Rs 1216 crore. In comparison, the Indian IT services industry grew 23% in the last 12 months. In dollar terms, the revenues declined 8.5% sequentially to $ 271 million
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