• Baring India is Willing to Sell, Only at a ‘Suitable’ Price
• ChrysCapital booked 400% return on its investment
• Strategic acquisitions ensure leadership
Do You Want to Buy MphasiS? Baring is there with 34.9% stake on the table!
MphasiS BFL - a global IT and BPO service provider with a market value of $650 million, is on the block. Baring Private Equity Partners, a leading international private equity asset manager that currently holds 34.9% stake in MphasiS through Baring India Investments Ltd is scouting for a deal in order to exit one of its most successful investments.
The potential buyers on the other side of the table include names such as Electronic Data Systems (EDS), Temasek Holdings, Carlyle Group, Hinduja TMT, and CapGemini etc.
Its stake sale has been the subject of speculation in the past. A statement from the top management of Baring, "Given our strong customer franchise and robust growth prospects, we would not like to entertain any of the offers. It is business as usual" (issued in August 2005, when a round of talks with possible buyers failed). In May 2005, the managing partner of Baring had said in a statement, “Given the current valuation of the company, there has been a lot of unsolicited interest in the company at significant premium. With a view to exploring the potential opportunity to maximize shareholder value, we have retained an investment bank to advise us.” The statement was issued in the context of the news that Baring had appointed Standard Chartered Bank’s investment banking division to scout for a buyer for its stake in MphasiS.
An aggressive expectation by Baring is considered to be the main reason for the failure of such talks that started as early as 2002. Despite several rounds of failed talks, Baring has the reasons to exit the investment now, and expect a ‘good’ price for it.
MphasiS’ expertise is focused on financial services, logistics and technology verticals. Its services span across architecture, application development/management and integration, business process outsourcing, including the operation of large-scale customer contact centers.
MphasiS BFL was formed in February 2000 by the merger of MphasiS and BFL, both funded by Baring Private Equity Partners. It is ranked as 7th largest Third Party Call Centre and BPO company and 16th largest Indian IT Software & Service Exporter company of India (NASSCOM rankings for 2004-05).
EDS Deal Talks: Did They Actually Talk?
MphasiS BFL issued a statement to Bombay Stock Exchange on Jan. 25, 2006 saying, “the Company has not received any official communication from Barings, or any other shareholder, regarding sale of their stake to EDS”. The company clarified to the exchange that the reports regarding EDS buying Baring Private Equity Partners' stake and the stake of the Chairman in MphasiS BFL Ltd were merely speculation.
The clarification only tells us that no such deal has happened. Sources at Baring have also clarified that MphasiS stake sale is not among the things they are currently discussing. The negotiations were carried through the private equity arm of Standard Chartered Bank.
The talks seem to have been called off. The reasons of failure of the talks include the price, as well as the package for the Chairman & CEO Jerry Rao.
ChrysCapital booked 400% return on its investment!
While Baring is trying to fetch the best possible price for its investment in MphasiS, the other VC fund ChrysCapital that invested in MphasiS in July 2001, exited completely on August 31, 2005. According to media reports, ChrysCapital sold about 6.4% stake in MphasiS for $29.4 million (Rs. 130 crore). ChrysCapital had invested $10 million in the company for a 7% stake in July 2001, and bought 7.4% again from the open market in a price range between $0.59 and $2.26 (Rs. 26 to Rs. 100) per share. ChrysCapital had sold around 8% in the company in the third quarter of 2004. The average acquisition cost for ChrysCapital was 70 cents (Rs. 31) after adjustment for stock splits, while the blended sale price stood at $3.39 (Rs. 150), a clear 400% gain.
Strong Fundamentals:
MphasiS BFL was among the top picks in the mid-cap Indian IT stocks segment by a number of brokerages after the financial results for quarter ended December 2005. Its revenue grew 6.6% quarter-on-quarter (QoQ) and 26.4% year-on-year (YoY) to $54.3 million (Rs. 2.4 billion).
The company registered an EBITDA margin expansion of 140 basis points (bps) quarter-on-quarter (QoQ) to 23.2% in the third quarter ended December 2005 (post the 400 bps expansion in second quarter of financial year 2005-06). Net profit at $9.23 million (Rs. 40.84 crore) grew slower at 1.7% QoQ due to negative other income. Company’s basic earning per share (EPS) has improved from $0.04 (Rs.1.73) in the quarter ended December 2004 to 0.06 (Rs. 2.55) in the quarter ended December 2005.
Broking firms are expecting the annual EPS to reach $0.22 (Rs. 10) for the year to March 2006 and $0.27 (Rs. 12.1) for the year to March 2007 compared to $0.18 (Rs. 8.2) for the year to March 2005. Broking firms are expecting MphasiS BFL to report revenue growth of 23.4% and 25% in FY06E and FY07E, and net income growth of more than 28% and 20% in FY06E and FY07E, respectively.
Quarter
ending
Revenue
Net Income
$ Mln
$ Mln
Rs. Cr
% Chng
$ Mln
Rs. Cr
% Chng
Dec'05
54.79
242.45
6.6
9.23
40.84
1.7
Sep'05
51.40
227.45
3.5
9.08
40.16
19.2
Jun'05
49.65
219.70
7.1
7.62
33.7
8.9
Mar'05
46.35
205.08
6.9
7.00
30.96
15.2
Dec'04
43.35
191.82
-0.6
6.07
26.87
-14.7
Sep'04
43.61
192.99
9.8
7.12
31.51
-10.7
Jun'04
39.72
175.78
10.7
7.97
35.28
40.4
Mar'04
35.89
158.80
6.8
5.68
25.13
-11.8
Dec'03
33.59
148.63
4.0
6.44
28.49
11.9
Sep'03
32.30
142.92
9.8
5.75
25.46
30.6
Jun'03
29.43
130.22
7.7
4.40
19.49
4.1
Mar'03
27.32
120.88
4.3
4.23
18.72
3.0
(Note: Original figures are in rupee, while convenience translation at
the rate of Rs. 44.25 per dollar used to get the dollar figures)
Over a period of last 3 years the company has widened its client-base. The client concentration seems to be top-heavy because it earns 17% of its total revenue from the top client (21% in June 2003), 45% from the top 5 clients (53% in June 2003), 62% from the top 10 clients (70% in June 2003) and 75% from the top 20 clients (86% in June 2003). Workforce utilization is an area of concern, because the utilization rate is only 66% in BPO segment (65% in the quarter ending June 2003), and 75% in IT services segment same as the quarter ended June 2003.
Look, who is the Boss:
Jaithirth (Jerry) Rao (Chairman & CEO) and Jeroen Tas (Vice Chairman) are both former Citibank executives.
Jaithirth (Jerry) Rao
Jerry built and developed Citibank's consumer businesses as the Country/Regional Manager in India, Middle East, Eastern Europe and U.K. He previously headed Citibank's Global Technology Development Division and their Global Electronic Cards Division. He was also the Chairman and CEO of Transaction Technologies Inc. based in California. When he left Citicorp, Mr. Rao was part of the Operating Review Group (top 50 Managers in the company). Jerry has testified before the US Congress on e-commerce. In 1998, Mr. Rao left Citicorp to start MphasiS Corporation, a software company based in California, which subsequently merged with BFL Software in 2000 to form MphasiS BFL.
Jerry Rao, a relative of India’s second largest IT company Infosys’ chief mentor N.R. Narayana Murthy, has, in recent years, become the high profile public face of not only MphasiS, but also the IT industry itself. He was selected the chairman of NASSCOM, the trade body representing about 900 Indian IT companies, for 2004-05.
Shareholding pattern:
The current shareholding in MphasiS BFL (as on 31st December 2005) shows that Baring India is the only shareholder with a sizable chunk of 34.9% stake, while the Chairman Jerry Rao and his holding company together have about 8.6% stake. The rest of the shareholding is quite scattered, and include names such as FID Funds Mauritius Ltd, HSBC Global Investment Funds, Templeton Mutual Fund and Merrill Lynch Capital Markets ESPANA SA SVB, who might have a say in any show of strength in future.
Category
% Shareholding
Institutional Investors
42.38
Mutual Funds
10.80
Templeton Mutual Fund
4.98
Fidelity Equity Fund
1.23
Banks, Financial Institutions and Insurance companies
0.35
FIIs
31.23
FID Funds Mauritius Ltd
7.94
HSBC Global Investment Funds Mauritius Ltd
5.73
HSBC Global Investment Funds
1.12
Merrill Lynch Capital Markets ESPANA SA SVB
4.19
Aberdeen International
3.29
Citigroup Global Markets Mauritius Pvt Ltd
1.25
CLSA Mauritius Ltd
1.09
Others
57.62
Baring India Investments Ltd
34.90
MphasiS Holdings Ltd
4.62
Jaithirth (Jerry) Rao
3.98
Others (Directors)
0.71
Indian Public
8.41
NRIs/OCBs
1.73
If we compare the shareholding pattern as on 31st December 2005 compared to 30th June 2005, there are following noticeable changes:
• Winter Fall Ltd: nil vs. 6.17% (Operating company of ChrysCapital that sold out in August 2005)
• Global Technology Ventures Ltd: nil or less than 1% vs. 1.9%
• Jaithirth (Jerry) Rao: 3.98% vs. 5.42% (MphasiS' Chairman)
• Overall in ‘Mutual Funds and UTI' category: 10.8% vs. 4.34%
• Templeton Mutual Fund: 4.98% vs. nil or less than 1% *
• HSBC Equity Fund: nil or less than 1% vs. 1.5%
• Overall in ‘FII' category: 31.23% vs. 22.33% (* Less than 1% shareholding is not reported separately to the exchanges.)
Bonus Share Issue is an Annual Ritual Here:
Issuing bonus shares has become a norm at MphasiS in recent years. It came with bonus issues on 2nd July 2003, 26th May 2004, and 11 November 2005. All the three bonus issues were in the ratio of 1:1.
And Acquisition has Become a Habit:
MphasiS BFL has been making regular acquisitions to maintain its growth and consolidate. In October 2002, company announced the acquisition of Shanghai-based software developer Navion, as it aimed to get a foothold in the Chinese economy. It acquired Kshema Technologies in April 2003 for $21 million (Rs. 92 crore) to enter into the healthcare and telecom verticals. It acquired Mumbai-based Onida Infotech, a division of MIRC Electronics Limited, for an amount of $700,000 (Rs 3 crore) in an all cash deal in January 2004. In February 2005, it acquired London-based consulting firm Princeton Consulting for $14 million (Rs. 63 crore). This deal was immediately followed by the acquisition of Eldorado Computing Inc, a US based healthcare benefits management solutions firm, for $16.5 million in March 2005.
