HP's $8.8-bn write-off pulls down MphasiS stock

Last Updated: Wed, Nov 21, 2012 19:42 hrs

Bangalore-based information technology services and solutions company MphasiS on Wednesday saw its stock fall four per cent in intra-day trade, after Hewlett-Packard (HP), its parent company, yesterday announced it was writing off $8.8 billion due to a massive accounting scandal at its British software unit, Autonomy.

The stock, however, recovered to close at Rs 394.9 a share on the BSE, down one per cent from the previous close of Rs 398.9.

Yesterday, HP had announced it had taken a $8.8 billion ‘charge’ on Autonomy, as a few former executives of the acquired company had “wilfully misrepresented” accounts. Analysts said the fall in the MphasiS stock was primarily because of a knee-jerk reaction from the market. However, many felt new challenges at HP might delay MphasiS’ plans of delisting from Indian bourses or its plans of a share buyback.

"We don't see any impact to our relationship and business with HP as a result of this announcement on Autonomy. They are and will continue to be an important partner in our business. We also don't see any change to our strategy of hyper-specialisation and growth of direct business. We will continue to innovate around emerging services and bring differentiated value to our customers," said Ganesh Ayyar, chief executive officer, MphasiS.

“I do not think this news would have any impact on MphasiS because the business the company gets from HP has nothing to do with Autonomy. What we have to see is if this would further impact the business HP gives to MphasiS.

With new problems cropping at HP at regular intervals, it seems MphasiS will not be a focus for it, which might mean delisting would be unlikely or the buyback of stock would be held-up,” said an analyst of a leading brokerage firm on condition of anonymity.

HP contributes about 55 per cent to MphasiS’ revenue. HP’s business is divided into two segments — the HP Channel business and HP as a client. However, MphasiS’ management has successfully been focusing on expanding its direct business (non-HP business) consistently.

For the quarter ended July, direct business accounted for 45 per cent of the company's revenue, against 33 per cent a year earlier.

In a meeting of analysts in October, MphasiS had said business from HP would be under pressure. “MphasiS’ commentary indicated little respite from the challenges in HP Channel over the near term, as ramp-down pressures may last over the next few quarters. Revenues from HP Channel declined to Rs 770 crore in the third quarter of FY12 from Rs 920 crore in the fourth quarter of FY10,” Ashish Chopra of Motilal Oswal said in a report.

“I don’t think this write-off will impact MphasiS in any way, as HP had taken a similar write-off last quarter on account of its acquisition of EDS. Though that had a direct co-relation with MphasiS, the company didn’t see any major impact,” said Pralay Das, an analyst with Elara Capital.

However, two consecutive financial blunders at HP may impact the company's credibility in the market. Issues like delisting and buyback at MphasiS might take a back seat,”

The MphasiS management has said it expects HP’s revenues to be under pressure, as HP Enterprise Services lost four key accounts. The company expects an additional sequential fall of five-six per cent in its HP volumes, along with no growth in its direct channel revenues for the quarter ended October. Analysts expect the direct channel business to grow 15-20 per cent in FY13, partly offsetting a 15 per cent fall in HP’s revenue.

Analysts said while an immediate impact was difficult to predict, the recent write-off might impact pricing discussions with MphasiS. “The master services agreement between MphasiS and HP was renewed recently. Then, MphasiS had said pricing was maintained at the market level. But my concern is after six months, when they would come for renegotiations yet again, they might ask for a price reduction due to the latest write-off,” said Ankita Somani, research analyst, Angel Broking.

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