Blackstone has its task cut out with Mphasis


Mphasis Ltd’s latest results are a reminder that growth remains a challenge for the company. Revenue fell by 1.6% sequentially to $225 million. Business that comes via Hewlett Packard Enterprise (HPE) fell only marginally last quarter, which is a heartening sign. But the direct channel business, the main growth driver for the company, reported a 0.46% sequential decline in revenue to $160 million. That is a worry.

Clearly, a lot needs to be done before Mphasis becomes a viable acquisition for Blackstone Group Lp. On a year-on-year basis as well, revenue fell by 1.3% in the March quarter, largely because of a sharp decline in business through the HPE channel.

Although HPE has given a minimum revenue commitment as part of the acquisition deal, it will at best ensure that this portion of the business will remain flat for the next five years. In other words, the direct channel business will need to grow at a rather high rate for company average growth to match or beat the industry average.

For now, investors are betting that the private equity firm will be successful in turning the company around. Mphasis shares trade at Rs.472.20 apiece, far higher than the price Blackstone agreed to pay HPE (Rs.430), as well as the open offer price for minority shareholders (Rs.457.50).

Blackstone’s portfolio companies, some believe, are now potential clients for Mphasis. At the time of the acquisition, Amit Dixit, Blackstone’s senior managing director, had said that its portfolio companies collectively have an information technology budget of $1 billion annually. He added that in the period between 2007 and 2011, its investee company Intelenet Global Services signed seven Blackstone portfolio companies as customers, which eventually contributed to 27% of its revenue.

Be that as it may, it’s important to note that Intelenet is much smaller in size, while Mphasis is nearly a $1 billion company. It would be too much to expect a similar level of impact on Mphasis’s revenue and growth.

Also, while some investors have placed bets that Blackstone could succeed with the acquisition, a number of analysts have a “sell” rating on the Mphasis stock. While valuations aren’t particularly demanding, expecting growth to return to industry levels anytime soon is clearly a tall order. According to an analyst with a multinational brokerage firm, investors should be able to enter at lower levels going forward, considering that the recovery will be protracted.