hsbc may22 q2

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Sustained parent-driven growth likely. A mid-tier Indian IT services company of which

Hewlett-Packard (HPQ US, Not Rated) owns 61%, MphasiS’ top-line growth has

outperformed peers over the last few quarters due to strong traction in its HP/EDS

accounts. We find further scope for inroads in the HP/EDS accounts, as HP’s cost-saving

targets warrant further offshoring of c10-12K employees by end-FY10. With EDS’ focus

on large deals and a high proportion of ‘offshorable’ services, we believe there is potential

to offshore 60% of commercial outsourcing work.

Material upside sensitivity to HP/EDS growth. We see upside potential to our estimates

from even a modest rise in the HP/EDS Services business. We estimate 2% top-line

growth here could expand MphasiS’ top line by c16% in FY10e. On the other hand, our

current estimates are relatively immune to the downside risks in the parent’s business, as

our forecasts are primarily based on HP/EDS cost savings and not business growth.

Forecasts and valuation. We forecast COGS growth to be in line with headcount growth

and factor in only a modest decline in pricing, as a large proportion of revenue is from

offshore, where pricing is already at a 15-20% discount to sector leaders. We initiate

coverage with an Overweight (V) rating and a TP of INR430, valuing the stock at 11.0x

our FY10e EPS, or a c25% discount to its large-cap peers – in line with the historic range.

The recent stock run could cap upside in the near term, but likely earnings upgrades

should be a trigger for the price.

HSBC valuation summary

Revenue (USDm) EBIT (%) EPS (INR) P/E

FY09e 845 19.9% 37.6 8.6xFY10e 942 20.0% 38.7 8.4xFY11e 1,055 21.0% 43.1 7.5x

Source: HSBC estimates

Overweight (V) Target price (INR) 430.00 Share price (INR) 325.55 Potential total return (%) 32.1

Mar 2008a 2009e 2010e

HSBC EPS 14.08 37.64 38.74 HSBC PE 23.1 8.6 8.4

Performance 1M 3M 12M

Absolute (%) 36.4 91.6 40.7 Relative^ (%) 10.2 7.8 45.4

Note: (V) = volatile (please see disclosure appendix)

MphasiS (MPHL IN)

Initiate OW(V): Well positioned to outperform

We find further scope for inroads into the HP/EDS accounts, as HP’s cost-saving targets warrant further offshoring

Modest growth in HP/EDS services business could provide material upside to our current top-line estimates

We initiate with an Overweight (V) and TP of INR430, valuing the stock at 11x our FY10e EPS of INR39

Telecoms, Media & Technology IT Services Equity – India

Company report

5 June 2009

Yogesh Aggarwal * Analyst HSBC and Capital Markets (India) Private Limited + +9122 2268 1246 [email protected]

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to NYSE and/or NASD regulations.

Issuing office: HSBC Securities and Capital Markets (India) Private Limited

Disclaimer & Disclosures. This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, that form part of it.

Index^ BOMBAY SE IDX Index level 15,009RIC MBFL.BOBloomberg MPHL IN

Source: HSBC

Enterprise value (INRm) 61221Free float (%) 39Market cap (USDm) 1,442Market cap (INRm) 68,059

Source: HSBC

MphasiS (MPHL IN) IT Services 5 June 2009

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Financials & valuation Financial statements

Year to 03/2008a 03/2009e 03/2010e 03/2011e

Profit & loss summary (INRm)

Revenue 19,065 41,194 45,209 50,634EBITDA 1,931 6,209 6,872 8,608Depreciation & amortisation 948 1,995 2,170 2,025Operating profit/EBIT 2,879 8,204 9,042 10,633Net interest 45 56 558 893PBT 3,097 8,492 9,677 11,603HSBC PBT 3,097 8,492 9,677 11,603Taxation -143 -595 -1,548 -2,553Net profit 2,954 7,897 8,128 9,051HSBC net profit 2,954 7,897 8,128 9,051

Cash flow summary (INRm)

Cash flow from operations 1,598 8,292 9,779 10,201Capex -1,260 -1,747 -2,034 -2,025Cash flow from investment -1,204 -3,847 -2,034 -2,025Dividends 0 -839 -1,227 -1,473Change in net debt 407 -4,101 -6,517 -6,702FCF equity -1,597 2,723 3,328 4,048

Balance sheet summary (INRm)

Intangible fixed assets 2,959 2,911 2,911 2,911Tangible fixed assets 4,136 3,705 3,569 3,569Current assets 12,715 19,320 26,563 34,484Cash & others 546 4,647 11,164 17,866Total assets 20,155 28,618 35,726 43,648Operating liabilities 4,294 4,997 5,204 5,547Gross debt 0 0 0 0Net debt -546 -4,647 -11,164 -17,866Shareholders funds 14,302 22,162 29,063 36,640Invested capital 14,970 16,292 16,676 17,552

Ratio, growth and per share analysis

Year to 03/2008a 03/2009e 03/2010e 03/2011e

Y-o-y % change

Revenue -21.3 116.1 9.7 12.0EBITDA 22.2 221.6 10.7 25.3Operating profit 3.1 185.0 10.2 17.6PBT 16.4 174.2 14.0 19.9HSBC EPS 15.7 167.3 2.9 11.3

Ratios (%)

Revenue/IC (x) 1.4 2.6 2.7 3.0ROIC 20.5 48.8 46.1 48.5ROE 22.9 43.3 31.7 27.5ROA 16.3 32.4 25.3 22.8EBITDA margin 10.1 15.1 15.2 17.0Operating profit margin 15.1 19.9 20.0 21.0EBITDA/net interest (x) Net debt/equity -3.8 -21.0 -38.4 -48.8Net debt/EBITDA (x) -0.3 -0.7 -1.6 -2.1CF from operations/net debt

Per share data (INR)

EPS reported (fully diluted) 14.08 37.64 38.74 43.14HSBC EPS (fully diluted) 14.08 37.64 38.74 43.14DPS 2.00 4.00 5.00 6.00Book value 55.16 60.00 105.67 138.56

Valuation data

Year to 03/2008a 03/2009e 03/2010e 03/2011e

EV/sales 3.5 1.5 1.2 0.9EV/EBITDA 35.0 9.9 8.0 5.6EV/IC 4.5 3.8 3.3 2.7PE* 23.1 8.6 8.4 7.5P/Book value 5.9 5.4 3.1 2.3FCF yield (%) -2.3 4.1 5.1 6.1Dividend yield (%) 0.6 1.2 1.5 1.8

Note: * = Based on HSBC EPS (fully diluted)

Price relative

105

155

205

255

305

355

2007 2008 2009 2010

105

155

205

255

305

355

Mphasis Rel to BOMBAY SE SENSITIVE INDEX

Source: HSBC Note: price at close of 04 Jun 2009


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Room for parent-driven growth HP’s cost-saving target warrants addition of

10-12K offshore staff

HP is targeting cost savings of USD1bn from

EDS integration in FY09 (ending October 2009)

and USD3bn (annually) in the next 6-8 quarters.

We believe the primary levers to achieve these

cost targets could be:

Headcount reduction: HP plans to cut

headcount by c25K in high-cost regions. It

plans to replace c50% of these in offshore

locations in the long term and expects to

invest USD700m for the same. At end

January 2009, the company was ahead of plan

with 9,000 reductions in the workforce, and

by April 2009 it had achieved half of its target

and reduced the workforce by c12K. MphasiS

has added c5,000 employees in the past two

Investment summary

We find further scope for inroads in the HP/EDS accounts, as HP

cost-saving targets warrant further offshoring

Modest growth in HP/EDS services business would provide

material upside to the MphasiS top line

INR strength and renegotiation of the MSA with HP remain the

primary risks to further upgrades in earnings estimates

MphasiS growth engine

EDS – Offshore potential of 10K to reach 60% offshore staffing target (assuming 35K of onsite staff engaged in public sector projects do not offshore)

HP – targets annual savings of USD3bn in 6-8 quarters, which involves reduction in workforce by c24K. The co is already through with 12K headcount reduction.

Tailwinds – 80% of EDS business are l-term projects where offshore potential is high; c2% growth in HP/EDS business could create demand for c3K offshore staff (16% of revenue growth for Mphasis)

Headwinds – EDS losing business in mega deals such as Xerox and GM, or losing technology agnostic charm with clients

Mphasis opportunity - To achieve our FY09/10 top-line targets, Mphasis needs to add c5K

staff by FY10 end, which seems plausible; pick up in the non-related party and HP/EDS

services business as macro improves could provide significant upside

Mphasis so far – The co added c5K staff in the past two quarters as HP reduced onsite workforce by 12K and is on track to achieve the stipulated cost saving target

Source: HSBC


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quarters and our forecasts factor in a further

growth of c5,000 staff by the end of FY10

(October 2010).

EDS offshore potential of 10K

As of October 2008, EDS employed 135K

engineers, of which c35K worked on government

contracts where offshoring potential is negligible.

Of the remaining 100K working on commercial

deals, 45K are operating from global delivery

centres and constitute 45% of the commercial

workforce. According to management, the

company aims to offshore 50-60% of the

headcount, depending on the ‘offshorability’ of

the service line (less for IMS, higher for

applications, variable for BPO). We believe 60%

of EDS headcount could be offshored, which

would mean there is scope to add c10K

employees in India.

Further upside from EDS growth

Although EDS’ historic performance has not been

impressive, taking reference from the IBM

success and a healthy pipeline, we believe

HP/EDS services might see traction in FY10,

assisted by an improving macro environment. We

estimate that a modest 2% top-line growth in the

HP/EDS services division could result in business

of cUSD136m (assuming projects have a 20%

offshore proportion), resulting in a need for

c3,000 offshore staff.

Non-related party business could provide

further upside

Additionally, for MphasiS, non-related party

business (c29%) might see traction in FY10 as the

macro environment improves and IT spending

picks up from the current dismal levels.

Are margins sustainable? While the improvement in profitability in the past

few quarters is noteworthy, we believe the margin

expansion was predominantly driven by INR

weakness, rather than any material operational

improvement. From the current level, we do not

envisage further scope to improve profitability, and

margins are likely to remain range-bound. We

expect COGS (primarily wages) to grow in line with

the volume growth. However, material risks – such

as INR appreciation and a rising proportion of low-

margin BPO in the revenue mix – remain and

warrant continued attention.

Upside to current valuations The stock has seen a significant run in the past few

months, primarily led by the upgrade in earnings.

We believe there is potential for upside from these

levels, as the opportunity for further earnings

upgrades remains.

Our target is based on relative valuation,

underpinned by a fundamental DCF analysis. We

initiate coverage with an Overweight (V) and a TP

of INR430, valuing the stock at a PE of 11.0x our

FY10e EPS, which is a c25% discount to its large-

cap peers and to the historic trading range.

Risks

INR appreciation remains the key risk to our

margin forecast, as recent strength in margins

has been driven primarily by INR weakness in

the past few quarters. The rupee has appreciated

by 5-6% from recent lows, and we estimate that

every 1pp fall in INR affects margin by c50bps

HP renegotiating the MSA with MphasiS,

resulting in downside risk for the billing rate

HP deciding to de-list MphasiS at a price not

favourable to minority shareholders

HP deciding to prefer its global delivery centre

over MphasiS for offshore work

Material deterioration in the

demand environment


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Large-cap valuation

_____EV/Sales______ _______ P/E _______ ____ EV/EBIT____ _______ FY10 y/y________ CAGR FY09-11 INR Ticker Rating Price TP FY09 FY10e FY11e FY09 FY10e FY11e FY09 FY10e FY11e Revenues

(USD) Revenues

(INR) EPS

(INR)Sales (USD)

EPS (INR)

HCL Tech HCLT IN N(V) 174 145 0.9x 0.9x 0.8x 10.0x 14.1x 9.2x 5.6x 5.8x 5.0x 4.5% 7.4% -29.1% 7.3% 4.1%INFOSYS INFO IN N(V) 1,627 1,600 3.9x 3.8x 3.4x 15.6x 16.1x 15.1x 13.3x 14.0x 13.0x -5.3% 3.2% -3.0% 3.2% 1.6%TCS TCS IN N(V) 708 670 2.4x 2.3x 2.0x 13.2x 13.6x 12.7x 9.9x 10.6x 9.6x -5.0% 2.4% -3.3% 3.9% 2.0%WIPRO WPRO IN UW(V) 391 345 2.2x 2.1x 1.9x 14.6x 15.2x 14.1x 12.5x 13.0x 11.6x -3.2% 3.4% -4.1% 3.8% 1.9%India Large-Cap Avg 2.4x 2.3x 2.0x 13.3x 14.8x 12.8x 10.3x 10.9x 9.8x

Price at close of 04 Jun 2009 Source: HSBC estimates

Mid-cap valuation

_____ EV/Sales______ ____ EV/EBIT______ _______ P/E ________ Price Mcap (INRm)

Mcap (USDm)

EV (INR m) FY10e FY11e FY12e FY10e FY11e FY12e FY10e FY11e FY12e

CAGR 09-11e Sales

EPS EBITMargin FY09e

EBITMargin FY10e

EBITMargin FY11e

MPHASIS* 325.3 68,250 1,401 64,739 1.6x 1.4x 1.3x 7.9x 7.2x 6.1x 8.6x 8.4x 7.5x 10.9% 7.1% 19.9% 20.0% 21.0%PATNI COMPUTER

263.9 33,807 694 33,807 1.1x 1.1x 1.0x 9.0x 8.8x 8.7x 10.2x 10.0x 9.7x 2.2% 2.7% 11.9% 12.2% 11.8%

TECH MAHINDRA

669.6 81,512 1,674 74,819 1.7x 1.7x 1.7x 8.5x 8.5x 7.9x 11.0x 11.0x 10.9x 5.7% 5.1% 20.5% 21.7% 22.1%

HEXAWARE TECHS.

51.2 7,355 151 7,355 0.7x 0.7x 0.6x 6.6x 9.1x 5.7x 14.1x 11.8x 7.1x 0.8% 19.3% 10.5% 7.5% 11.0%

MINDTREE 492.0 18,693 384 18,693 1.5x 1.3x 1.1x 9.7x 8.5x 6.2x 11.9x 10.4x 7.8x 15.2% 23.5% 15.0% 15.3% 17.7%

Price at close of 04 Jun 2009; * MphasiS FY10 above ends 31 October 2009 Source: HSBC estimates for MphasiS and Tech Mahindra (TECHM IN, OW V), DataStream for other stocks

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Investment summary 3 Room for parent-driven growth 3 Are margins sustainable? 4 Upside to current valuations 4

Risks 4

Parent-driven growth 7 Headroom for offshoring 7 HP’s saving target warrants addition of c12K

offshore staff 8 EDS offshore potential = 10K 8

Headcount forecasts 9

Significant upside from EDS growth 9 Pricing risk remains, albeit limited 10

HP/EDS profiling 11 Standalone EDS 11

Consistent underperformance 11

Standalone HP 12 Before the EDS acquisition… 12

… and after 13

EDS business risks could hit offshore ramp-up 13

Margins sustainable 14 Impressive margin expansion 14

Non-operational reasons drive margin 14

Margins to remain in a band 15 INR appreciation remains a key risk 15

Financials and valuation 16 Financials 16

Cash flow 16

Tax rate 16

Valuation 16 Earnings revisions buck sector trend 16

Overweight (V), TP INR430 17 DCF assumptions 17

Risks 18

MphasiS profile 19 MphasiS at a glance 20

Disclosure appendix 22

Disclaimer 27

Contents

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Headroom for offshoring We believe there is further potential to increase

offshoring in HP/EDS accounts. This implies that

MphasiS should continue to see growth in its top

line, albeit at a more muted pace than over the last

few quarters.

There are four revenue-generating channels

for MphasiS:

HP/EDS Captive (channel 1): MphasiS provides

services to HP/EDS as a subcontractor on a rate-

card, negotiated under an MSA1.

HP/EDS sold business (channel 2): As above,

MphasiS provides services as a subcontractor to

HP/EDS. While there is a higher level of direct client

interaction with the MphasiS staff in this channel

than the one above, the company is not involved in

the business development phase, and MphasiS bills

directly to the parent HP/EDS, and not the client.

1 MSA - Master Service Agreement signed between the vendor and the client to avoid rate negotiation for every project

Revenue profile (2QFY09)

EDS 44%

Non-related

party 28%

EDS

partnership

and other

related

party 28%

Source: Company, HSBC

Together, channels 1 and 2 contributed c45% of

MphasiS’ revenue in 2QFY09.

HP/EDS partnership (channel 3): MphasiS

collaborates with EDS to bid for projects and

respond to RFP2 in this case. MSAs and billing

rates are negotiated directly with the clients and

are hence market-driven. This channel contributed

c28% to revenue.

2 RFP - Request for Proposal is raised by the client for the vendors for prospective deals

Parent-driven growth

HP’s cost-saving target and EDS’ underpenetrated offshore

capacity suggest there is further scope for MphasiS to increase its

traction in the parent client base

Pricing pressure likely to be modest as offshore rates are already

at a 20% discount to industry leaders

Our forecast factors in revenue sharing with HP GDC and EDS

business risks from mega deal ramp-downs

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Revenue from non-related-parties was c28% in

the last quarter. Revenue from this segment has

been on a downward trend, declining c10% in the

last quarter.

Below, we examine the potential to penetrate

channel 1 and 2 accounts by looking at HP’s cost-

saving targets and EDS’ offshoring potential.

HP’s saving target warrants addition of c12K offshore staff HP is targeting cost savings of USD1.0bn from

EDS integration in FY09 (year to October 2009)

and USD3.0bn3 (annually) in the next 6-8 quarters.

We believe the primary levers to achieve these cost

targets could be headcount reduction and cutting

redundant IT and real estate.

Headcount reduction

HP has announced plans to cut headcount by 24,600

in the high-cost regions in FY09. By the end of

January 2009 the company was ahead of plan, with

9,000 reductions in its workforce, and by April 2009

it had achieved half its target, having reduced the

workforce by c12K. HP plans to replace c50% of the

24,600 employees4 in offshore locations over the

long term (6-8 quarters) and expects to invest

USD700m for the same. MphasiS has already

increased its workforce by c5,000 in the past two

quarters, and our forecasts factor in a further growth

of c5,000 staff by the end of FY10 (October 2010).

Redundant IT and real-estate reduction

HP plans to rationalise its real-estate and support

functions (IT systems, HR and Accounting).

EDS offshore potential = 10K As of October 2008, EDS employed 135K

engineers, of which c35K worked on government

contracts, where offshore potential is negligible.

Of the remaining 100K working on commercial

3 The cost saving target was raised to USD3bn from USD2.5bn in May 2009 as the company identified further cost savings in real estate 4 As announced by the company on the 1Q and 2QFY09 analyst calls

market (non-government) deals, 45K are

operating from global delivery centres. According

to management, the company plans to offshore

50-60% of the headcount depending on the

‘offshorability’ of the service line (relatively less

for Infrastructure Management Services (IMS),

more for applications and variable for BPO). We

believe 60% of EDS headcount could be

offshored, which means there is scope to add

c10K employees in India.

Select global vendors’ offshore capacities

Offshore headcount as percentage of total

Target

Accenture 45% 50% CapGemini 28% 40% by 2010 IBM 30% GDC focus Atos Origin 11% 8K in offshore Logica 13% 8K by end of 2009

Source: Company data

While global vendors seem to have offshore

capacities (as a percentage of headcount) in the

range of 10-45%, we believe 50% is the sweet spot

among global companies. Considering that EDS

provides typical Application Development and

Maintenance (ADM) and IMS services, and has

low exposure to the cyclical consulting and system

integration services, we believe 60% offshoring of

its current workforce is feasible without significant

organisational restructuring or compromising

service levels.

Additionally, for EDS, large, long-term mega deals

constituted 80% of total revenue in 2007; hence

there are concerns over project delays, cost

overruns, project rescoping and delays in ramp-ups

in the large deals. Given these risks, to avoid cost

overruns, we believe management may leverage its

offshore potential further, resulting in further upside

for MphasiS.

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Headcount forecasts

As suggested above, MphasiS’ growth in FY10

and FY11 should be assisted by HP’s cost-saving

targets and further supported by the offshore

underpenetration in the EDS accounts.

We weigh these positives against the risks to

our prognosis:

Revenue share by the HP global delivery centre

in India. According to management, HP’s GDC

capabilities in terms of services and domain

expertise complement MphasiS and do not

compete with it. Nonetheless, we believe

modest growth in the HP/EDS business would

provide significant offshore growth potential

for both MphasiS and HP GDC.

Business risks of EDS: Primary risks to

HP/EDS business are: 1) mega deal ramp-

downs (GM, Xerox, and the US Navy), 2)

client hesitation to adopt EDS services as the

company loses its technology agnostic charm

due to HP parentage.

Balancing these headwinds against the positives,

we forecast MphasiS should add c4,800

employees in the next six quarters (c1,300 in

FY09 and c3,600 in FY10).

Significant upside from EDS growth Although EDS’ historic performance has not been

impressive, given IBM’s success and healthy

pipeline, we believe HP/EDS services could see

some traction in FY10. Hypothetically, a modest

2% growth in the HP/EDS services division could

result in a business of cUSD136m (assuming

projects have a 20% offshore proportion),

resulting in requirement of c3,000 offshore staff.

HP/EDS growth opportunity for MphasiS

FY09 revenues (HP/EDS Services)* 33,952 2% growth in FY10 34,631 Additional Revenues (USDm) 679 20% offshore (for MphasiS) 136 % revenue growth for MphasiS 16.1% Headcount addition in FY10 3,050

* Extrapolating the last quarter revenues for the full year Source: HSBC estimates

Non-related party business could provide

further upside

Additionally, for MphasiS, non-related party

business (c29%) might see traction in FY10 as the

macro environment improves and IT spending

picks up from current dismal levels.

Headcount forecasts

1Q08 2Q08 3Q08 4Q08 1Q09x 2Q09x 1Q09 2Q09 3Q09e 4Q09e FY09e FY10e

Total Employees 22,070 24,078 26,236 27,047 28,253 28,840 29,988 33,810 34,631 35,086 35,086 38,673 Onsite 1,197 1,152 1,225 1,377 1,474 1,615 1,721 1,759 1,766 1,766 1,766 1,897 Application Services 1,117 1,070 1,142 1,278 1,380 1,495 1,581 1,589 1,589 1,589 1,589 1,720 BPO Services 80 82 83 99 94 120 116 146 153 153 153 153 ITO - - - - - - 24 24 24 24 24 24 Offshore 20,873 22,926 25,011 25,670 26,779 27,225 28,267 32,051 32,864 33,319 33,319 36,775 Application Services 8,237 9,430 9,464 9,165 9,137 9,090 9,648 9,917 10,115 10,115 10,115 11,384 BPO Services 9,897 10,626 12,239 12,830 13,726 13,905 13,840 17,237 17,754 18,109 18,109 19,602 ITO 2,739 2,870 3,308 3,675 3,916 4,230 4,779 4,897 4,995 5,095 5,095 5,789

______________________________________________ Q-o-q _______________________________________________ ______ y-o-y_______

Total Employees 10.3% 9.1% 9.0% 3.1% 4.5% 2.1% 4.1% 12.7% 2.4% 1.3% 21.8% 10.2%Onsite 28.3% -3.8% 6.3% 12.4% 7.0% 9.6% 5.1% 2.2% 0.4% 0.0% 7.9% 7.4%Application Services 31.6% -4.2% 6.7% 11.9% 8.0% 8.3% 4.1% 0.5% 0.0% 0.0% 4.6% 8.2%BPO Services -4.8% 2.5% 1.2% 19.3% -5.1% 27.7% -1.7% 25.9% 5.0% 0.0% 29.9% 0.0%ITO Offshore 9.4% 9.8% 9.1% 2.6% 4.3% 1.7% 4.1% 13.4% 2.5% 1.4% 22.7% 10.4%Application Services 8.4% 14.5% 0.4% -3.2% -0.3% -0.5% 6.3% 2.8% 2.0% 0.0% 11.5% 12.5%BPO Services 6.0% 7.4% 15.2% 4.8% 7.0% 1.3% -0.1% 24.5% 3.0% 2.0% 30.7% 8.2%ITO 27.7% 4.8% 15.3% 11.1% 6.6% 8.0% 12.9% 2.5% 2.0% 2.0% 20.4% 13.6%

Source: Company data, HSBC estimates

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Pricing risk remains, albeit limited

We ascertain the risks around the sustainability of

the charge-out rate of MphasiS, now that a significant proportion of revenues are follow-through from the parent company. We believe that in

line with the market conditions faced by other Indian vendors, HP could ask for pricing discounts from MphasiS in the coming quarters. However, we

believe that the overall impact could be lower for MphasiS compared to the overall industry (which we estimate is c2-3% on average for offshore) for the

following reasons:

To determine the downside risk, we compared the billing rate to Infosys, the sector bellwether.

Onsite billing rates, notwithstanding the mid-size vendor discount, are in line with Infosys

rates. However, MphasiS derives a high proportion of revenue from offshore, resulting in lower blended rate (cUSD32) compared to

Infosys (cUSD41).

Offshore rates for MphasiS are already at a c16% discount to the sector leaders, cushioning

the downside.

As the proportion of MphasiS’ onsite revenue is low (c28%), the discount to onsite billing rates will not affect overall revenue significantly. Overall, we acknowledge the risk of HP pushing for pricing discounts, albeit modestly, considering the already discounted offshore billing rates of MphasiS. Please refer to the table, ‘Our pricing assumptions for MphasiS (onsite and offshore)’ for more information.

Our pricing assumptions for MphasiS (onsite and offshore)

Average billing rates (USD/hr) 1Q08 2Q08 3Q08 4Q08 1Q09x 2Q09x 1Q09 2Q09 3Q09e 4Q09e FY09e FY10e

Onsite

Applications 68 68 68 68 68 69 71 71 71 71 71 71 ITO - - - - - - 70 70 70 70 70 70 Offshore - - - - - - - - - - - -Applications 21 21 22 22 22 22 22 22 22 21 22 21 BPO 10 10 10 10 10 10 10 10 10 10 10 10 ITO 20 20 21 21 21 21 21 21 21 21 21 21

____________________ q-o-q change _____________________ ____________________ y-o-y change _____________________Onsite

Applications 1.5% 0.0% 0.0% 0.0% 0.0% 1.5% 2.9% 0.0% 0.0% 0.0% 2.9% 0.0%ITO n/a 0.0% 0.0% 0.0% 0.0% 0.0%Offshore Applications 0.0% 0.0% 4.8% 0.0% 0.0% 0.0% 0.0% 0.0% -2.0% -2.0% -1.5% -2.5%BPO 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -2.0% -3.0% -1.7% -3.3%ITO 5.3% 0.0% 5.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -2.0% -0.5% -1.5%


Onsite billing rate Offshore billing rates

50

55

60

65

70

75

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09

Infosys* Mphasis**

10

15

20

25

30

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09

Infosys* Mphasis**

* Infosys: Blended realisation; MphasiS: Hourly billing rate for Application division only Source: Company data, HSBC

Source: Company data, HSBC

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Standalone EDS Before being acquired by HP in August last year,

EDS was the second-largest IT services company

globally with 2007 revenue of cUSD22bn. EDS

derives 52% of its revenue from IMS and is one of

the strongest players in the market (see chart below).

EDS was also one of the top IT vendors in Europe

with revenue of cUSD6.5bn in 2007.

Consistent underperformance

Notwithstanding its strong position in the IT

market, EDS has lagged its global peers in the

past 6-7 years, particularly in the wake of the dot-

com era. We attribute this muted performance to

the following factors:

Global peers such as Accenture and IBM have

developed domain expertise and high-end

consulting capabilities over the last few years,

resulting in strong growth in their downstream

revenue in the ADM, IMS and BPO segments.

EDS, on the other hand, continued to focus on

the IMS and BPO markets, ignoring the

importance of high-end services.

HP/EDS profiling

HP targets headcount reduction of c25k by year-end. Plans to

move 50% of those jobs to low-cost regions

Revival of IT spending could provide further upside for offshoring

traction by MphasiS in the parent accounts

Likely mega deal ramp-downs (GM, Xerox) and losing its

technology-agnostic attribute are risks to HP/EDS services

growth prospects

EDS revenue profile (2007) EDS revenue profile (2007)

America

USD10.4

47%

US Gov t

USD2.6bn

12%

Others

USD0.9bn

4%

APAC

USD1.8bn

8%

EMEA

USD6.4bn

29%

Other

USD1.1bn

5%

BPO

USD3.1bn

14%

IMS

USD11.5bn

52%

Application

Serv ices

USD6.4bn

29%

Source: EDS, HSBC Source: EDS, HSBC

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Furthermore, in these focus markets of EDS

there was a structural change as offshore

emerged as an integral part of the offering for

clients looking to cut costs. As Indian vendors

emerged strongly in the offshore market,

followed by the ramp-ups by global vendors,

EDS remained a laggard in offshore

development. In 2006, when EDS acquired

MphasiS, the company had a modest c3,000

staff in India.

EDS’ historic performance

17.0

18.0

19.0

20.0

21.0

22.0

23.0

1999 2000 2001 2002 2003 2004 2005 2006 2007

-2%0%2%4%6%8%10%12%

Rev enues (USDbn) EBIT margin

Source: EDS, HSBC

The profile improved materially post the MphasiS

acquisition. The combined entity (EDS/MphasiS)

had c45K headcount in global delivery centres,

with c30K in India, prior to the EDS acquisition

in August 2008 by HP.

Standalone HP HP acquired EDS in August 2008 to strengthen its

IT Services business. Historically, hardware vendors

such as IBM have done reasonably well in IT

Services as IBM was able to cross-sell high-margin

IT services along with the lower-margin hardware

products. Following the IBM strategy, HP bolstered

its position in the IT services market through its EDS

dominant position in this market.

Before the EDS acquisition…

Before EDS, IT services contributed to c20% of HP

revenues. More than 50% of this work was targeted

towards technical and warranty services of the

hardware sales by HP. The company offered

offshore facilities to its IT services clients through its

Global Delivery Centres (GDC) in India, employing

c29K engineers at the time of the EDS acquisition.

For annual revenues of cUSD10bn (excluding the

technology services), we believe offshore capacity of

29K could provide a sufficient offshore component

in the deals.

HP revenue profile 2Q09 (ends April 09 – reported in May) HP’s operating margin 2Q09 (ends April 09 – reported in May)

PS 8.2bn

30%

Serv ices

8.5bn 31%

HP FS

0.6bn 2% *I & P

5.9bn 21%

* *ESS

3.5bn 13%

HP

Softw are

0.9bn 3%

18.2%

4.6%7.2%

17.8%

13.8%

7.2%

11.1%

0%

5%

10%

15%

20%

I & P

*

PS

ESS*

*

HP

Softw

are

Serv

ices

HP

FS

Tota

l HP

Source: * I & P – Imaging and printing; ** ESS – Enterprise Storage and Solution; PS – Personal Systems, HP FS: HP Financial Services Source: HP, HSBC

Source: * I & P – Imaging and printing; ** ESS – Enterprise Storage and Solution; PS – Personal Systems Source: HP, HSBC

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HP Services (3Q08, before EDS acquisition)

TS 2.4bn

50%

OS 1.5bn

31%

C&I 0.9bn

19%

TS – technology Services; OS – Outsourcing Services; C&I – Consulting and Integration Services Source: HP, HSBC

… and after

For HP, the contribution of IT Services as a

percentage of total revenue post the EDS acquisition

increased to c35% last quarter. In terms of offshore

capacity EDS added 30K offshore employees

(including MphasiS) to 30K already present in the

HP GDC.

HP IT Services (post EDS acquisition) – 1Q09

ITO 3.9bn

45%

App

Serv ices

1.6bn 18%

BPO 0.7bn

8%

Tech

Serv ices

2.5bn 29%

Source: HP, HSBC

HP is targeting cost savings of USD1.0bn from

EDS integration in FY09 (year to October 2009)

and USD3.0bn (annually) in the next 6-8 quarters.

EDS business risks could hit offshore ramp-up

Risks relating to key clients

Risks around some of EDS’ largest clients could

result in higher redundancies in onsite staff and

likely slow down the ramp-up of outsourcing. Large

contracts such as the US Navy (an in-house

transition), GM (in the light of the operational

problems it is facing), and Xerox (HP’s competitor)

could ramp down in coming quarters. Together, a

ramp-down of USD1bn in the GM and Xerox

contracts – the large ‘offshorable’ clients – could

significantly undermine the company’s offshore

transition. HP IT services in the quarter ended

January 2009 declined c7% on a pro-forma basis.

On a positive note, HP recently commented that the

total pipeline for HP IT Services is growing and

HP/EDS joint capabilities are getting traction with

significant signings of two Fortune 100 companies

last quarter.

Losing its technology-agnostic charm

While IBM has mastered the art of selling hardware,

software and services integration solutions to its

clients and has retained its technology-agnostic

services portfolio, clients might be wary of HP’s

influence on EDS services.

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Impressive margin expansion MphasiS made significant improvement in its

profitability as the EBIT margin improved 570bps

in the NDJ 20095 quarter, compared to the JAS

20086 quarter.

EBIT margin trends

15.6%

11.6%12.7%12.3%11.5%9.9%

11.2%

21.6%

15.8%

21.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

FY06

FY07

1Q08

2Q08

3Q08

4Q08

1Q09x

2Q09x

1Q09

2Q09*

* End-April 2009 Source: Company, HSBC

This followed a c460bps improvement in the JAS

2008 quarter sequentially – overall, an impressive

c10% expansion in EBIT margin in seven months.

While the improvement is noteworthy, we believe

the margin expansion was predominantly driven by 5 NDJ - Quarter of months November, December 2008 and January 2009 6 JAS 2008: July, August, September 2008

INR weakness rather than any material operational

improvements. In the quarter ended April 2009, the

company reported a flat operating margin.

We do not envisage further scope to improve

profitability from current levels and we believe

margins are likely to remain range-bound. We

expect COGS (primarily wages) to grow in line

with volume growth. However, material risks

remain and warrant continued attention – namely,

INR appreciation vis-à-vis the dollar and the rising

proportion of low-margin BPO in the revenue mix.

Non-operational reasons drive margin

We suggested earlier that INR weakness was the

main driver of MphasiS’ margin expansion. INR

weakened c11% on average in the NDJ 2009 quarter

compared to the JAS 2008 quarter. We estimate a

1ppt depreciation in INR expands the EBIT margin

by c50bps, assuming c20% of the expense is

incurred in INR. This adds c550bps to the margin,

explaining the margin expansion entirely.

Operational performance and cost cutting were

rather insignificant in the last few quarters. Wage

costs went up 9.2% and 10.5% in the January and

April ending quarters respectively, compared to

the c5-6% growth in USD revenues.

Margins sustainable

Recent margin improvement primarily driven by INR depreciation,

not operational improvement

Further improvement unlikely; we expect margins to remain in a

band as COGS grow in line with volume growth

INR appreciation and aggressive pricing discounts to HP remain

the key risks to margins in FY10

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Operational parameters

1Q09x 2Q09x 1Q09 2Q09

___________________ Revenue Share _____________________Onsite 24% 26% 29% 25% Offshore 76% 74% 72% 75%

________________ Employee Growth q-o-q__________________Total Employees 4.5% 2.1% 4.1% 12.7% Onsite 7.0% 9.6% 5.1% 2.2% Application Services 8.0% 8.3% 4.1% 0.5% BPO Services -5.1% 27.7% -1.7% 25.9% ITO 0.0% 0.0% 0.0% 0.0% Offshore 4.3% 1.7% 4.1% 13.4% Application Services -0.3% -0.5% 6.3% 2.8% BPO Services 7.0% 1.3% -0.1% 24.5% ITO 6.6% 8.0% 12.9% 2.5%


In the quarter ended January 2009, MphasiS cut

travel (down 17% q-o-q) and other infrastructure

costs such as electricity and communication

expenses, which provided a cushion of 170bps to

the margin. In the quarter ended April, COGS were

up 7.5% q-o-q, outpacing the growth in USD.

Margins to remain in a band We factor in an increase in the COGS on a

sequential quarter basis for the rest of FY10,

driven by the increase in headcount assumptions.

While it is difficult to envisage material upside to

the current margin profile, we believe the

company can maintain its current margin,

notwithstanding the increasing proportion of low-

margin BPO revenue, as evident from the

aggressive hiring in the division during 2QFY09.

INR appreciation remains a key risk

INR appreciation remains the key risk to our

margin forecast as the current strength in margins

has been driven by INR weakness over the past

few months. The INR has appreciated by 5-6%

from recent lows, and every 1pp fall in INR

affects margins by c50bps, as we said earlier.

COGS forecasts

________________% to revenues ______________ _______________ q-o-q increase________________ 1Q09 2Q09 3Q09e 4Q09e 1Q09 2Q09 3Q09e 4Q09e

Salary and allowances 39.3% 40.5% 42.7% 43.7% 9.2% 10.5% 5.0% 3.0% Contribution to PF 3.5% 2.3% 2.3% 2.3% 11.6% -30.6% 0.0% 0.0% Staff welfare 1.8% 1.5% 1.5% 1.5% -15.5% -11.2% 0.0% 0.0% Travel 2.1% 2.5% 2.5% 2.5% -17.1% 28.9% 0.0% 0.0% Recruitment charges 0.3% 0.3% 0.4% 0.4% 10.5% 39.0% 10.0% 5.0% Communication expenses 2.0% 1.8% 1.8% 1.8% -8.2% -1.5% 0.0% 0.0% Rent 3.6% 3.5% 3.7% 3.7% 9.5% 3.8% 4.0% 0.0% Professional charges 0.1% 0.2% 0.2% 0.2% 13.9% 25.3% 10.0% 10.0% D&A 4.7% 4.9% 4.9% 4.8% 9.6% 12.4% -1.3% -1.5% Software development charges 3.3% 3.4% 3.7% 3.9% 27.4% 8.6% 10.0% 5.0% Staff training expenses 0.1% 0.0% 0.0% 0.0% -50.5% -98.2% 0.0% 0.0% Electricity 1.1% 1.0% 1.0% 1.0% -4.6% -5.7% 0.0% 0.0% Software charges 4.1% 4.4% 4.4% 4.4% -2.9% 16.2% 0.0% 0.0% Misc 1.3% 1.2% 1.2% 1.2% 16.2% -0.5% 0.0% 0.0%

Total COGS 67.3% 67.5% 70.3% 71.3% 6.5% 7.5% 3.7% 2.0%


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Financials Our forecasts for MphasiS: a snapshot

1Q09 2Q09 3Q09e 4Q09e FY09e FY10e

Revenue (USDm) 201 208 217 219 845 942 Revenues (INRm) 9,777 10,484 10,439 10,494 41,194 45,209 EBIT (INRm) 2,106 2,266 1,967 1,866 8,204 9,042 EPS (INR) 10.0 10.7 8.8 8.2 37.6 38.7 _________ q-o-q ___ ___ y-o-y____ Revenue (USDm) 2.6% 3.6% 4.6% 0.5% n/a 11.5% Revenues (INRm) 9.3% 7.2% -0.4% 0.5% n/a 9.7% EPS (INR) n/a 6.9% -18.2% -6.6% n/a 0.0% EBIT margin 21.5% 21.6% 18.8% 17.8% 19.9% 20.0%

Source: HSBC estimates

Cash flow

FCF improved materially in 1QFY10 compared to

historic trends for two main reasons:

Debtors and unbilled revenues (receivables)

declined considerably as a proportion of sales.

DSO declined to 81 days from the historic

trend of 87 days

Capex as a percentage of sales declined

Tax rate

The tax rate in the NDJ 2009 quarter was

exceptionally low at 3.2% due to the utilisation of

deferred tax assets. We forecast an increase in the

tax rate, with a negative impact on earnings.

Tax rate for MphasiS

1Q09 2Q09 1Q10 2Q10e 3Q10e 4Q10e FY10e FY11e

Tax rate 7.3% 5.1% 3.2% 7.2% 8.0% 10.0% 7.0% 16.0%


Valuation Earnings revisions buck sector trend

The stock has seen a significant run in the past

few months, led by the upgrade in consensus

earnings. We believe there is upside from these

levels as the opportunity for further earnings

upgrades remains.

Financials and valuation

The stock warrants further re-rating as upside risks to consensus

earnings outweigh downside risks

We initiate coverage with an OW(V) rating and a TP of INR430

We value the stock at 11x our FY10e EPS, at a 25% discount to

larger peers and in line with the two-year average

Cash and CF forecasts

FY07 FY08 1Q09x 2Q09x 1Q09 2Q09 3Q09e 4Q09e FY09e FY10e

Cash and Investments (USDm) 44 24 28 8 63 70 104 142 142 278 Cash and Investments 1,892 953 1,165 388 3,115 3,555 4,990 6,838 6,838 13,355 FCF (48) (405) 75 172 2,388 874 1,434 1,848 6,545 7,745 FCF/EBITDA -2% -10% 6% 10% 93% 31% 58% 78% 64% 69%

Source: Company data, HSBC estimates. (x refers to the period for the seven months ending October 2008)

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Consensus earnings upgrades

Average EPS forecast (INR) EPS Revision

Current 34.9 1 month ago 31.2 +11.6% 3 months ago 22.4 +55.3% 6 months ago 21.5 +62.1%

Source: DataStream, HSBC

12-month forward PE trends

0

5

10

15

20

25

30

Feb-07 Aug-07 Feb-08 Aug-08 Feb-09

MPHASIS 2Y Av g 1Y Av g


Overweight (V), TP INR430 Our target is based on relative valuation,

underpinned by a fundamental DCF analysis. We

initiate with an OW(V) and a TP of INR430,

valuing the stock at a PE of 11.0x our FY10e

EPS, at a c25% discount to the large-cap peers7, in

line with the historic range. Our relative valuation

is underpinned by a fundamental DCF valuation.

7 Large-cap peers include Infosys, TCS and Wipro

DCF assumptions

Our DCF valuation drives a value of INR430, in

line with the relative valuation. We forecast a

sales CAGR of 13.3% over FY09-15e and an

average EBIT margin of 17% for this period.

We assume a terminal growth rate of 5% and a

WACC of 13.8%.

DCF assumptions

_________________WACC Assumptions__________________

Risk-free rate 8.0% Equity risk premium 5.8% Cost of Equity 13.8% Target Gearing 0.0% WACC 13.8%

__________________DCF Assumptions___________________

Sales CAGR 09-15 13.3% Avg OM 09-15 17.2% FCF CAGR 09-15 53.8% Terminal Growth rate 5.0% Enterprise value 91,627 Equity Value/share 434


Under our research model, for Indian stocks with a

volatility indicator, the Neutral band is 10ppt around

the hurdle rate of 11%. Our INR430 target price

suggests potential total return of 32% over the 4 June

closing price of INR325, including dividend; thus

we are Overweight (V) on MphasiS stock.

Discount to larger peers (Average of TCS, Infosys, Wipro)

-20%

0%

20%

40%

60%

Jan-00

Jan-00

Jan-00

Feb-00

Mar-00

Mar-00

Mar-00

Apr-00

Apr-00

May-00

May-00

Jun-00

Jun-00

Jul-00

Jul-00

Aug-00

Aug-00

Sep-00

Mphasis discount to the sector Av erage discount


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Risks INR appreciation remains the key risk to our

margin forecast, as the strength in margins

over the past few quarters has been driven by

INR weakness. The rupee has appreciated by

5-6% from recent lows, and we find every

1ppt fall in INR hits the margin by c50bp

HP renegotiating the MSA with MphasiS,

resulting in downside risk for the billing rate

HP deciding to delist MphasiS at a price not

favourable to minority shareholders

HP deciding to prefer its global delivery

centre over MphasiS for offshore work

Material deterioration in the

demand environment

HSBC forecasts

P&L, October ending, INRm FY07 FY08 FY09x FY09e FY10e FY11e

Revenues 17,606 24,230 19,065 41,194 45,209 50,634Gross Profit 4,419 5,494 4,810 12,723 14,015 16,203Selling expenses 918 953 728 1,829 2,034 2,279G&A 1,442 1,716 1,192 2,682 2,939 3,291Operating Profit 2,044 2,791 2,879 8,204 9,042 10,633PBT 1,983 2,661 3,097 8,492 9,677 11,603Income taxes 183 109 143 595 1,548 2,553Net Profit 1,801 2,552 2,954 7,897 8,128 9,051EPS Diluted (INR) 8.6 12.2 14.1 37.6 38.7 43.1 EBITDA Margin 11.6% 16.5% 20.1% 24.8% 24.8% 25.0%Operating Margin 11.6% 11.5% 15.1% 19.9% 20.0% 21.0%Net Margin 10.2% 10.5% 15.5% 19.2% 18.0% 17.9%BS, October ending, INRm Share capital 2,082 2,087 2,089 2,090 2,090 2,090Reserves and surplus 7,935 9,421 12,213 20,072 26,973 34,551Secured Loans 28 57 54 44 44 44Total funds 10,112 11,626 14,417 22,246 29,147 36,724Fixed assets 2,518 3,633 4,136 3,705 3,569 3,569Goodwill 2,710 2,449 2,959 2,911 2,911 2,911Investments - - - 2,191 2,191 2,191 Debtors and unbilled revenues 4,210 5,802 8,810 9,430 10,156 11,375Cash and bank balances 1,892 953 546 4,647 11,164 17,866Interest receivables 11 3 2 1 1 1Loans and advances 1,592 2,956 3,357 5,242 5,242 5,242 Current liabilities 1,949 3,026 4,240 4,921 5,128 5,471Provisions 1,049 1,404 1,498 1,452 1,452 1,452Total funds 10,112 11,626 14,417 22,246 29,147 36,724CF, October ending, INRm Operating profit before working capital changes 2,929 4,006 4,005 10,478 11,847 13,629 Debtors and unbilled revenues (1,430) (1,710) (2,849) (606) (727) (1,219) Loans and advances (202) (758) 19 (1,226) - - Current liabilities and provisions 774 1,091 660 632 207 343 Net cash provided by operating activities 1,668 2,011 1,598 8,292 9,779 10,201 Purchase of fixed assets (1,717) (2,416) (1,260) (1,747) (2,034) (2,025) Net cash used in investing activities (1,646) (2,302) (1,204) (3,847) (2,034) (2,025) Dividend paid including dividend tax - - - (839) (1,227) (1,473) Net cash provided by financing activities (225) (631) (787) (498) (1,227) (1,473) Cash and cash equivalents at end of the period 1,893 953 546 4,647 11,164 17,866FCF (Operating Cash Flow - CAPEX) (48) (405) 339 6,545 7,745 8,175

Source: Company data, HSBC estimates (FY09x refers to the seven months ending October 2008)

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MphasiS is a mid-size IT services company with

revenue of USD600m in FY08 and expected

revenue of USD845m in FY098. It employs

c34,000 staff. EDS acquired a controlling stake in

MphasiS in June 2006 to bolster its offshore

capacity from a modest 3,000 to 15,000. MphasiS

grew strongly post this acquisition, as the parent

contributed to 40% of the revenue by end-FY08.

Shareholding pattern

EDS

61%

II

20%

Non-II

19%

II – Institutional Investors, Non-II – Non-Institutional investors Source: NSE

Last year in August, HP acquired EDS to bolster

its services business and compete head-on with

IBM. Post the EDS acquisition, there have been

concerns over MphasiS’ growth prospects as HP

maintains a strong global delivery centre in India,

commensurate in size with MphasiS.

8 October 2009 ending

Management profile

Within months of the EDS acquisition, HP

revamped top management at MphasiS, naming

HP veterans for the top positions:

9 February 2009: Andy Mattes was appointed

as MphasiS Chairman from his earlier role as

senior vice president of Applications Services

for EDS.

28 January 2009: Ganesh Ayyar was appointed

as the CEO and member of the MphasiS Board

of Directors. He joined MphasiS from HP,

where he was vice president, Managed

Services, Asia Pacific & Japan.

Other members of the executive team include

Susanto Banerjee, CFO.

History

MphasiS Limited (then MphasiS BFL Limited)

was formed in June 2000 after the merger of the

US-based IT consulting company MphasiS

Corporation (founded in 1998) and the Indian IT

services company BFL Software Limited

(founded in 1993).

MphasiS profile

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MphasiS at a glance Revenue profile (2QFY09 – April ending quarter) Revenue profile (Services break-up, 2QFY09)

EDS 44%

Non-related

party 28%

EDS

partnership

and other

related

party 28%

AM 33%

S/T HD 7%

KP 4%

AD 32%

IMS 14%

Customer

Serv ice 8%

TP S 5%


Source: TPS: Transaction Processing Service; KP: Knowledge Processes; S/T HD: Service/Technical Help Desk Source: Company data, HSBC

Revenue profile (Vertical break-up, 2QFY09) Revenue profile (Geographic break-up, 2QFY09)

BFSI 4 0%M&R 13%

T & OEMs

24%

H&P 7%L &T 6 %

Telec om

12%

NA 70.6%

Europe

20.4%

ME&I 5.9% APAC

5.4%

Source: T & OEMs: Technology and OEMs; L &T Logistics, Airlines and Transportations; H &P: Healthcare and Pharma; M&R: Manufacturing and Retail Source: Company data, HSBC


Revenue growth trends EBIT margin trends

0%

5%

10%

15%

20%

25%

2Q07 4Q07 2Q08 4Q08 2Q09x 2Q09

Rev enues (USD) T ota l Employ ees

15.6%

11.6 %12.7%12.3%1 1.5%9 .9%

1 1.2%

21.6%

15 .8%

21 .5%

0. 0%

5. 0%

10.0%

15.0%

20.0%

25.0%

FY06

FY07

1Q08

2Q08

3Q08

4Q08

1Q09x

2Q09x

1Q09

2Q09*

Source: Company data, HSBC Source: Company data, HSBC

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Notes

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Notes

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Disclosure appendix Analyst certification The following analyst(s), who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Yogesh Aggarwal

Important disclosures

Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the risk free rate for that stock's domestic, or as appropriate, regional market and the relevant equity risk premium established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,

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stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Prior to this, from 7 June 2005 HSBC applied a ratings structure which ranked the stocks according to their notional target price vs current market price and then categorised (approximately) the top 40% as Overweight, the next 40% as Neutral and the last 20% as Underweight. The performance horizon is 2 years. The notional target price was defined as the mid-point of the analysts' valuation for a stock.

From 15 November 2004 to 7 June 2005, HSBC carried no ratings and concentrated on long-term thematic reports which identified themes and trends in industries, but did not make a conclusion as to the investment action that potential investors should take.

Prior to 15 November 2004, HSBC's ratings system was based upon a two-stage recommendation structure: a combination of the analysts' view on the stock relative to its sector and the sector call relative to the market, together giving a view on the stock relative to the market. The sector call was the responsibility of the strategy team, set in co-operation with the analysts. For other companies, HSBC showed a recommendation relative to the market. The performance horizon was 6-12 months. The target price was the level the stock should have traded at if the market accepted the analysts' view of the stock.

Rating distribution for long-term investment opportunities

As of 05 June 2009, the distribution of all ratings published is as follows: Overweight (Buy) 34% (33% of these provided with Investment Banking Services)

Neutral (Hold) 39% (32% of these provided with Investment Banking Services)

Underweight (Sell) 27% (29% of these provided with Investment Banking Services)

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HSBC & Analyst disclosures Disclosure checklist

Company Ticker Recent price Price Date Disclosure

MPHASIS MBFL.NS 325.55 04-Jun-2009 4Source: HSBC

1 HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next

3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this

company. 4 As of 30 April 2009 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 April 2009, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 April 2009, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-investment banking-securities related services. 7 As of 30 April 2009, this company was a client of HSBC or had during the preceding 12 month period been a client of

and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as

detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this

company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in

securities in respect of this company Analysts are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company, please see the most recently published report on that company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures 1 This report is dated as at 05 June 2009. 2 All market data included in this report are dated as at close 03 June 2009, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Chinese Wall procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer * Legal entities as at 22 October 2008 'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Burkhardt AG, Dusseldorf; 000 HSBC Bank (RR), Moscow; 'IN' HSBC Securities and Capital Markets (India) Private Limited, Mumbai; 'JP' HSBC Securities (Japan) Limited, Tokyo; 'EG' HSBC Securities Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; 'GR' HSBC Pantelakis Securities S.A., Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv, 'US' HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler A.S., Istanbul; HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. - Banco Múltiplo, HSBC Bank Australia Limited, HSBC Bank Argentina S.A., HSBC Saudi Arabia Limited.

Issuer of report HSBC Securities and Capital Markets (India) Private Limited Registered Office 52/60 Mahatma Gandhi Road Fort, Mumbai 400 001, India Telephone: +91 22 2267 4921 Fax: +91 22 2263 1983 Website: www.research.hsbc.com

This document has been issued by HSBC Securities and Capital Markets (India) Private Limited ("HSBC") for the information of its customers only. HSBC Securities and Capital Markets (India) Private Limited is regulated by the Securities and Exchange Board of India. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies and may also be represented in the supervisory board or any other committee of those companies. The information and opinions contained within the research reports are based upon publicly available information and rates of taxation applicable at the time of publication which are subject to change from time to time. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. © Copyright. HSBC Securities and Capital Markets (India) Private Limited 2009, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Securities and Capital Markets (India) Private Limited. MICA (P) 258/09/2008

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Global Stephen Howard Analyst, Global Sector Head +44 20 7991 6820 [email protected]

Europe Dominik Klarmann Analyst +49 211 910 3720 [email protected]

Nicolas Cote-Colisson Analyst +44 20 7991 6826 [email protected]

Luigi Minerva Analyst +44 20 7991 6928 [email protected]

Thorsten Zimmermann Analyst +49 211 910 2852 thorsten.zimmermann@ hsbctrinkaus.de

Manish Beria, CFA Analyst +91 80 3001 3796 [email protected]

Amit Sachdeva Analyst +91 80 3001 3795 [email protected]

Dhiraj Saraf, CFA Analyst +91 80 3001 3773 [email protected]

Sunil Rajgopal Analyst +91 80 3001 3794 [email protected]

Americas Richard Dineen Analyst +1 212 525 6707 [email protected]

Gabriel E. Gonzalez Media +52 55 5721 2580 [email protected]

Europe & North America Credit Research Madeleine King, CFA Analyst +44 20 7991 6789 [email protected]

Specialist Sales

Timothy Maunder-Taylor +44 20 7991 5006 [email protected]

Annabelle O'Connor +44 20 7991 5040 [email protected]

Thomas Koenen +49 211 910 4402 [email protected]

Myles McMahon +852 2822 4676 [email protected]

Asia Steven C Pelayo Analyst +852 2822 4391 [email protected]

Tse-yong Yao Analyst +852 2822 4397 [email protected]

Tucker Grinnan Analyst +852 2822 4686 [email protected]

Walden Shing Analyst +852 2996 6751 [email protected]

Carlos Dimas Analyst +813 5203 3814 [email protected]

Neale Anderson Analyst +813 5203 3826 [email protected]

Henry Lee Associate +813 5203 4412 [email protected]

Wanli Wang Analyst +8862 8725 6020 [email protected]

Christine Wang Analyst +8862 8725 6024 [email protected]

Leo Tsai Associate +8862 8725 6022 [email protected]

Percy Panthaki Analyst +91 22 2268 1240 [email protected]

Rajiv Sharma Analyst +91 22 2268 1239 [email protected]

Yogesh Aggarwal Analyst +91 22 2268 1246 [email protected]

Suran Seong Analyst +822 3706 8753 [email protected]

Global Emerging Markets (GEMs) Hervé Drouet Analyst +44 20 7991 6827 [email protected]

Emerging Europe, Middle East & Africa (EMEA) Kunal Bajaj Analyst +971 4507 7200 [email protected]

Vangelis Karanikas Analyst +30 210 696 5211 [email protected]

Avshalom Shimei Analyst +972 3 710 1197 [email protected]

Bülent Yurdagül Analyst +90 212 376 46 12 [email protected]

Sergey Fedoseev Analyst +44 20 7991 6831 [email protected]

Global Telecoms, Media & Technology Research Team

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