HP s troubles to hit Mphasis

Mid-sized information technology services firm Mphasis, which has been struggling to grow its revenue, seems headed for tougher times after its parent and biggest client Hewlett Packard cut its sales forecast.

Late last week,  HP CEO  Meg Whitman  warned of a sharp fall in HP earnings this year, with revenue declines in each of its business divisions except software. Mphasis, the India-based IT services subsidiary of HP, gets around 50% of its revenues from the troubled PC maker.
"We see HP's depressed outlook for enterprise services business as a sign that Mphasis' problems with its largest client are likely to get worse," Mumbai-based analysts Pinku Pappan and Ashwin Mehta of Japanese brokerage Nomura wrote in their latest report, while advising clients to sell the Mphasis stock.

HP had said its enterprise services division, which constitutes a significant part of Mphasis's revenues, is expected to see a 11-13% drop in revenues this year due to weakness in four major accounts. Since last Wednesday, when HP cut its outlook, shares of Mphasis have fallen more than 4% on the Bombay Stock Exchange. From Rs 420.9 last Wednesday, Mphasis shares have fallen to Rs Rs403.6 on Monday.

An Mphasis spokeswoman did not go into the details of the impact of HP's forecast cut, but said Mphasis has been trying to reduce its dependence on HP.

"In pursuance of this strategy, we have made significant investments to grow our direct channel. Our performance in the last few quarters has been very encouraging," the spokeswoman said in an email response.

During the last quarter, Mphasis recorded sales of Rs 1,355 crore, with a 10% fall from the previous quarter, in the business it gets from HP. Over the past five quarters, HP's contribution to Mphasis revenues had declined by 26%. During a post-earnings call with analysts, Mphasis CEO Ganesh Ayyar said he expects further decline in the business from HP over the coming quarters.

"Mphasis is mindful of this. They are actively trying to grow their non-HP business. However, when 55% of your revenues come from a troubled entity, you know that there is no escaping from it," an analyst with a foreign brokerage said on condition of anonymity as he is not authorised to speak to the media.

Over the past few quarters, Mphasis's direct channel-the business it gets on its own-has grown to 45% of its overall revenues. Out of the 24 new clients it added during the previous quarter, 20 were from the direct channel.

The Bangalore-based firm is part of EDS, which HP acquired in 2008 for about $14 billion.

In May, HP announced that it would lay off about 27,000 employees over the next two years as part of a restructuring exercise that is expected to realign costs.