Company report

Telecoms, Media & Technology IT Services

Equity India

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Global Research

MphasiS (MPHL IN)

Overweight (V)
Target price (INR) Share price (INR) Potential total return (%)
Mar HSBC EPS HSBC PE Performance Absolute (%) Relative^ (%) 14.08 23.1 1M 36.4 10.2 37.64 8.6 3M 91.6 7.8

Initiate OW(V): Well positioned to outperform

430.00 325.55 32.1
2010e 38.74 8.4 12M 40.7 45.4

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

2008a 2009e

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

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 HPs 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 parents 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) FY09e FY10e FY11e
Source: HSBC estimates

5 June 2009
Yogesh Aggarwal * Analyst HSBC and Capital Markets (India) Private Limited + +9122 2268 1246 yogeshaggarwal@hsbc.co.in

*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

EBIT (%) 19.9% 20.0% 21.0%

EPS (INR) 37.6 38.7 43.1

P/E 8.6x 8.4x 7.5x

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.

845 942 1,055

Index^ Index level RIC Bloomberg

Source: HSBC

BOMBAY SE IDX 15,009 MBFL.BO MPHL IN

Enterprise value (INRm) Free float (%) Market cap (USDm) Market cap (INRm)
Source: HSBC

61221 39 1,442 68,059

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Financials & valuation

Financial statements Year to 03/2008a 03/2009e 03/2010e 03/2011e Valuation data Year to EV/sales EV/EBITDA EV/IC PE* P/Book value FCF yield (%) Dividend yield (%) 03/2008a 3.5 35.0 4.5 23.1 5.9 -2.3 0.6 03/2009e 1.5 9.9 3.8 8.6 5.4 4.1 1.2 03/2010e 1.2 8.0 3.3 8.4 3.1 5.1 1.5 03/2011e 0.9 5.6 2.7 7.5 2.3 6.1 1.8

Profit & loss summary (INRm) Revenue EBITDA Depreciation & amortisation Operating profit/EBIT Net interest PBT HSBC PBT Taxation Net profit HSBC net profit Cash flow summary (INRm) Cash flow from operations Capex Cash flow from investment Dividends Change in net debt FCF equity Balance sheet summary (INRm) Intangible fixed assets Tangible fixed assets Current assets Cash & others Total assets Operating liabilities Gross debt Net debt Shareholders funds Invested capital 2,959 4,136 12,715 546 20,155 4,294 0 -546 14,302 14,970 2,911 3,705 19,320 4,647 28,618 4,997 0 -4,647 22,162 16,292 2,911 3,569 26,563 11,164 35,726 5,204 0 -11,164 29,063 16,676 2,911 3,569 34,484 17,866 43,648 5,547 0 -17,866 36,640 17,552 1,598 -1,260 -1,204 0 407 -1,597 8,292 -1,747 -3,847 -839 -4,101 2,723 9,779 -2,034 -2,034 -1,227 -6,517 3,328 10,201 -2,025 -2,025 -1,473 -6,702 4,048 19,065 1,931 948 2,879 45 3,097 3,097 -143 2,954 2,954 41,194 6,209 1,995 8,204 56 8,492 8,492 -595 7,897 7,897 45,209 6,872 2,170 9,042 558 9,677 9,677 -1,548 8,128 8,128 50,634 8,608 2,025 10,633 893 11,603 11,603 -2,553 9,051 9,051

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

Price relative
355 305 255 205 155 105 2007
Mphasis Source: HSBC

355 305 255 205 155 105 2008

Rel to BOMBAY SE SENSITIVE INDEX

2009

2010

Note: price at close of 04 Jun 2009

Ratio, growth and per share analysis Year to Y-o-y % change Revenue EBITDA Operating profit PBT HSBC EPS Ratios (%) Revenue/IC (x) ROIC ROE ROA EBITDA margin Operating profit margin EBITDA/net interest (x) Net debt/equity Net debt/EBITDA (x) CF from operations/net debt Per share data (INR) EPS reported (fully diluted) HSBC EPS (fully diluted) DPS Book value 14.08 14.08 2.00 55.16 37.64 37.64 4.00 60.00 38.74 38.74 5.00 105.67 43.14 43.14 6.00 138.56 1.4 20.5 22.9 16.3 10.1 15.1 -3.8 -0.3 2.6 48.8 43.3 32.4 15.1 19.9 -21.0 -0.7 2.7 46.1 31.7 25.3 15.2 20.0 -38.4 -1.6 3.0 48.5 27.5 22.8 17.0 21.0 -48.8 -2.1 -21.3 22.2 3.1 16.4 15.7 116.1 221.6 185.0 174.2 167.3 9.7 10.7 10.2 14.0 2.9 12.0 25.3 17.6 19.9 11.3 03/2008a 03/2009e 03/2010e 03/2011e

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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

Room for parent-driven growth

HPs 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

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)

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

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
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

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 lowmargin 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 largecap peers and to the historic trading range.

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

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

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

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Mid-cap valuation Price Mcap Mcap EV _____ EV/Sales______ ____ EV/EBIT______ _______ P/E ________ CAGR (INRm) (USDm) (INR m) FY10e FY11e FY12e FY10e FY11e FY12e FY10e FY11e FY12e 09-11e Sales 1,401 64,739 694 33,807 1,674 74,819 151 7,355 1.6x 1.1x 1.7x 0.7x 1.5x 1.4x 1.1x 1.7x 0.7x 1.3x 1.3x 1.0x 1.7x 0.6x 1.1x 7.9x 9.0x 8.5x 6.6x 9.7x 7.2x 8.8x 8.5x 9.1x 8.5x 6.1x 8.7x 7.9x 5.7x 6.2x 8.6x 10.2x 11.0x 14.1x 11.9x 8.4x 10.0x 11.0x 11.8x 10.4x 7.5x 10.9% 9.7x 2.2% 10.9x 7.1x 5.7% EPS EBIT EBIT EBIT Margin Margin Margin FY09e FY10e FY11e

MPHASIS* PATNI COMPUTER TECH MAHINDRA HEXAWARE TECHS. MINDTREE

325.3 68,250 263.9 33,807 669.6 81,512 51.2 7,355

7.1% 19.9% 20.0% 21.0% 2.7% 11.9% 12.2% 11.8% 5.1% 20.5% 21.7% 22.1% 7.5% 11.0%

0.8% 19.3% 10.5%

492.0 18,693

384 18,693

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

Large-cap valuation INR Ticker Rating Price TP _____EV/Sales______ _______ P/E _______ ____ EV/EBIT____ _______ FY10 y/y________ CAGR FY09-11 FY09 FY10e FY11e FY09 FY10e FY11e FY09 FY10e FY11e Revenues Revenues EPS Sales EPS (USD) (INR) (INR) (USD) (INR) 0.9x 3.9x 2.4x 2.2x 2.4x 0.9x 3.8x 2.3x 2.1x 2.3x 0.8x 3.4x 2.0x 1.9x 2.0x 10.0x 15.6x 13.2x 14.6x 13.3x 14.1x 16.1x 13.6x 15.2x 14.8x 9.2x 5.6x 5.8x 5.0x 15.1x 13.3x 14.0x 13.0x 12.7x 9.9x 10.6x 9.6x 14.1x 12.5x 13.0x 11.6x 12.8x 10.3x 10.9x 9.8x 4.5% -5.3% -5.0% -3.2% 7.4% 3.2% 2.4% 3.4% -29.1% -3.0% -3.3% -4.1% 7.3% 3.2% 3.9% 3.8% 4.1% 1.6% 2.0% 1.9%

HCL Tech HCLT IN INFOSYS INFO IN TCS TCS IN WIPRO WPRO IN India Large-Cap Avg
Price at close of 04 Jun 2009 Source: HSBC estimates

N(V) N(V) N(V) UW(V)

174 145 1,627 1,600 708 670 391 345

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

3
3 4 4 4

Margins sustainable
Impressive margin expansion Non-operational reasons drive margin Margins to remain in a band INR appreciation remains a key risk

14
14 14 15 15

Parent-driven growth
Headroom for offshoring HPs saving target warrants addition of c12K offshore staff EDS offshore potential = 10K Headcount forecasts Significant upside from EDS growth Pricing risk remains, albeit limited

7
7 8 8 9 9 10

Financials and valuation

Financials Cash flow Tax rate Valuation Earnings revisions buck sector trend Overweight (V), TP INR430 DCF assumptions Risks

16
16 16 16 16 16 17 17 18

HP/EDS profiling
Standalone EDS Consistent underperformance Standalone HP Before the EDS acquisition and after EDS business risks could hit offshore ramp-up

11
11 11 12 12 13 13

MphasiS profile
MphasiS at a glance

19
20

Disclosure appendix Disclaimer

22 27

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Parent-driven growth
HPs 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

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 ratecard, 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.

Revenue profile (2QFY09)

Non-related party 28% EDS 44% 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.

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

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

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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 HPs costsaving targets and EDS offshoring potential.

HPs 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

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 Accenture CapGemini IBM Atos Origin Logica
Source: Company data

Target 50% 40% by 2010 GDC focus 8K in offshore 8K by end of 2009

45% 28% 30% 11% 13%

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

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.

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

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Headcount forecasts
As suggested above, MphasiS growth in FY10 and FY11 should be assisted by HPs 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, HPs 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 rampdowns (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).
Headcount forecasts 1Q08 Total Employees Onsite Application Services BPO Services ITO Offshore Application Services BPO Services ITO Total Employees Onsite Application Services BPO Services ITO Offshore Application Services BPO Services ITO
Source: Company data, HSBC estimates

Significant upside from EDS growth

Although EDS historic performance has not been impressive, given IBMs 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)* 2% growth in FY10 Additional Revenues (USDm) 20% offshore (for MphasiS) % revenue growth for MphasiS Headcount addition in FY10
* Extrapolating the last quarter revenues for the full year Source: HSBC estimates

33,952 34,631 679 136 16.1% 3,050

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.

2Q08 24,078 1,152 1,070 82 22,926 9,430 10,626 2,870 9.1% -3.8% -4.2% 2.5% 9.8% 14.5% 7.4% 4.8%

3Q08 26,236 1,225 1,142 83 25,011 9,464 12,239 3,308 9.0% 6.3% 6.7% 1.2% 9.1% 0.4% 15.2% 15.3%

4Q08 27,047 1,377 1,278 99 25,670 9,165 12,830 3,675 3.1% 12.4% 11.9% 19.3% 2.6% -3.2% 4.8% 11.1%

1Q09x 28,253 1,474 1,380 94 26,779 9,137 13,726 3,916 4.5% 7.0% 8.0% -5.1% 4.3% -0.3% 7.0% 6.6%

2Q09x 28,840 1,615 1,495 120 27,225 9,090 13,905 4,230 2.1% 9.6% 8.3% 27.7% 1.7% -0.5% 1.3% 8.0%

1Q09 29,988 1,721 1,581 116 24 28,267 9,648 13,840 4,779 4.1% 5.1% 4.1% -1.7% 4.1% 6.3% -0.1% 12.9%

2Q09 33,810 1,759 1,589 146 24 32,051 9,917 17,237 4,897 12.7% 2.2% 0.5% 25.9% 13.4% 2.8% 24.5% 2.5%

3Q09e 34,631 1,766 1,589 153 24 32,864 10,115 17,754 4,995 2.4% 0.4% 0.0% 5.0% 2.5% 2.0% 3.0% 2.0%

4Q09e 35,086 1,766 1,589 153 24 33,319 10,115 18,109 5,095 1.3% 0.0% 0.0% 0.0% 1.4% 0.0% 2.0% 2.0%

FY09e 35,086 1,766 1,589 153 24 33,319 10,115 18,109 5,095 21.8% 7.9% 4.6% 29.9% 22.7% 11.5% 30.7% 20.4%

FY10e 38,673 1,897 1,720 153 24 36,775 11,384 19,602 5,789 10.2% 7.4% 8.2% 0.0% 10.4% 12.5% 8.2% 13.6%

22,070 1,197 1,117 80 20,873 8,237 9,897 2,739 10.3% 28.3% 31.6% -4.8% 9.4% 8.4% 6.0% 27.7%

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

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Our pricing assumptions for MphasiS (onsite and offshore) Average billing rates (USD/hr) Onsite Applications ITO Offshore Applications BPO ITO Onsite Applications ITO Offshore Applications BPO ITO
Source: Company data, HSBC estimates

1Q08

2Q08

3Q08

4Q08

1Q09x

2Q09x

1Q09

2Q09

3Q09e

4Q09e

FY09e

FY10e

68 21 10 20

68 21 10 20

68 22 10 21

68 22 10 21

68 22 10 21

69 22 10 21

71 70 22 10 21

71 70 22 10 21

71 70 22 10 21

71 70 21 10 21

71 70 22 10 21

71 70 21 10 21

____________________ q-o-q change _____________________ ____________________ y-o-y change _____________________ 1.5% 0.0% 0.0% 0.0% 0.0% 1.5% 2.9% n/a 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -2.0% -2.0% 0.0% 0.0% 0.0% -2.0% -3.0% -2.0% 2.9% 0.0% -1.5% -1.7% -0.5% 0.0% 0.0% -2.5% -3.3% -1.5%

0.0% 0.0% 5.3%

0.0% 0.0% 0.0%

4.8% 0.0% 5.0%

0.0% 0.0% 0.0%

0.0% 0.0% 0.0%

0.0% 0.0% 0.0%

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 followthrough 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 midsize 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.

Onsite billing rate

Offshore billing rates

75 70 65 60 55 50 1Q08 2Q08 3Q08 Infosy s* 4Q08 1Q09 2Q09 3Q09 Mphasis**

30 25 20 15 10 1Q08 2Q08 3Q08 Infosy s*

Source: Company data, HSBC

4Q08 1Q09 2Q09 3Q09 Mphasis**

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

10

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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

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.

past 6-7 years, particularly in the wake of the dotcom 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.

Consistent underperformance
Notwithstanding its strong position in the IT market, EDS has lagged its global peers in the

EDS revenue profile (2007)

EDS revenue profile (2007)

US Gov t Others USD0.9bn 4% APAC USD1.8bn 8% EMEA USD6.4bn 29%

Source: EDS, HSBC

Other BPO USD3.1bn 14% America USD10.4 47% Application Serv ices USD6.4bn 29% USD1.1bn 5%

USD2.6bn 12%

IMS USD11.5bn 52%

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

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

23.0 22.0 21.0 20.0 19.0 18.0 17.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Rev enues (USDbn)
Source: EDS, HSBC

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

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.

EBIT margin

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.

HP revenue profile 2Q09 (ends April 09 reported in May)

HPs operating margin 2Q09 (ends April 09 reported in May)

Serv ices 8.5bn 31%

HP FS 0.6bn 2% *I & P 5.9bn 21%

20% 15% 10%

18.2%

17.8% 13.8% 11.1% 7.2% 4.6% 7.2%

HP Softw are 0.9bn 3% * *ESS 3.5bn 13%

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

5% 0% HP Software PS 8.2bn 30% Services Total HP HP FS I & P* PS ESS**

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)

C&I 0.9bn 19%

EDS business risks could hit offshore ramp-up

Risks relating to key clients

TS 2.4bn 50% OS 1.5bn 31%

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 BPO 0.7bn

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 (HPs 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 companys 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

8% App Serv ices 1.6bn 18% ITO 3.9bn 45%

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 HPs influence on EDS services.

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.

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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

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

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--vis the dollar and the rising proportion of low-margin BPO in the revenue mix.

25.0% 20.0% 15.6% 15.0% 10.0% 5.0% 0.0%

FY06 FY07 1Q08 2Q08 3Q08 4Q08 1Q09x 2Q09x 1Q09

21.6% 21.5% 15.8%

12.7% 12.3% 11.6% 11.5% 11.2% 9.9%

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.
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

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Operational parameters 1Q09x 2Q09x 1Q09 2Q09

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 lowmargin BPO revenue, as evident from the aggressive hiring in the division during 2QFY09.

___________________ 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%
Source: Company data, HSBC

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.

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.

COGS forecasts ________________% to revenues ______________ _______________ q-o-q increase________________ 1Q09 2Q09 3Q09e 4Q09e 1Q09 2Q09 3Q09e 4Q09e Salary and allowances Contribution to PF Staff welfare Travel Recruitment charges Communication expenses Rent Professional charges D&A Software development charges Staff training expenses Electricity Software charges Misc Total COGS
Source: Company data, HSBC estimates

39.3% 3.5% 1.8% 2.1% 0.3% 2.0% 3.6% 0.1% 4.7% 3.3% 0.1% 1.1% 4.1% 1.3% 67.3%

40.5% 2.3% 1.5% 2.5% 0.3% 1.8% 3.5% 0.2% 4.9% 3.4% 0.0% 1.0% 4.4% 1.2% 67.5%

42.7% 2.3% 1.5% 2.5% 0.4% 1.8% 3.7% 0.2% 4.9% 3.7% 0.0% 1.0% 4.4% 1.2% 70.3%

43.7% 2.3% 1.5% 2.5% 0.4% 1.8% 3.7% 0.2% 4.8% 3.9% 0.0% 1.0% 4.4% 1.2% 71.3%

9.2% 11.6% -15.5% -17.1% 10.5% -8.2% 9.5% 13.9% 9.6% 27.4% -50.5% -4.6% -2.9% 16.2% 6.5%

10.5% -30.6% -11.2% 28.9% 39.0% -1.5% 3.8% 25.3% 12.4% 8.6% -98.2% -5.7% 16.2% -0.5% 7.5%

5.0% 0.0% 0.0% 0.0% 10.0% 0.0% 4.0% 10.0% -1.3% 10.0% 0.0% 0.0% 0.0% 0.0% 3.7%

3.0% 0.0% 0.0% 0.0% 5.0% 0.0% 0.0% 10.0% -1.5% 5.0% 0.0% 0.0% 0.0% 0.0% 2.0%

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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

Financials
Our forecasts for MphasiS: a snapshot 1Q09 2Q09 3Q09e 4Q09e FY09e FY10e Revenue (USDm) Revenues (INRm) EBIT (INRm) EPS (INR) Revenue (USDm) Revenues (INRm) EPS (INR) EBIT margin
Source: HSBC estimates

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%

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

Source: Company data, 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

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.

Cash and CF forecasts FY07 Cash and Investments (USDm) Cash and Investments FCF FCF/EBITDA 44 1,892 (48) -2% FY08 24 953 (405) -10% 1Q09x 28 1,165 75 6% 2Q09x 8 388 172 10% 1Q09 63 3,115 2,388 93% 2Q09 70 3,555 874 31% 3Q09e 104 4,990 1,434 58% 4Q09e 142 6,838 1,848 78% FY09e 142 6,838 6,545 64% FY10e 278 13,355 7,745 69%

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

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

60% 40% 20% 0%

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

-20%

Mphasis discount to the sector

Source: DataStream, HSBC

Av erage discount

Consensus earnings upgrades Average EPS forecast (INR) Current 1 month ago 3 months ago 6 months ago
Source: DataStream, HSBC

DCF assumptions
EPS 34.9 31.2 22.4 21.5 Revision +11.6% +55.3% +62.1%

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___________________

12-month forward PE trends

30 25 20 15 10 5 0 Feb-07 Aug-07 MPHASIS

Source: DataStream, HSBC

Feb-08

Aug-08 2Y Av g

Feb-09 1Y Av g

Sales CAGR 09-15 Avg OM 09-15 FCF CAGR 09-15 Terminal Growth rate Enterprise value Equity Value/share
Source: Company data, HSBC estimates

13.3% 17.2% 53.8% 5.0% 91,627 434

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.

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.

7 Large-cap peers include Infosys, TCS and Wipro

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HSBC forecasts P&L, October ending, INRm Revenues Gross Profit Selling expenses G&A Operating Profit PBT Income taxes Net Profit EPS Diluted (INR) EBITDA Margin Operating Margin Net Margin BS, October ending, INRm Share capital Reserves and surplus Secured Loans Total funds Fixed assets Goodwill Investments Debtors and unbilled revenues Cash and bank balances Interest receivables Loans and advances Current liabilities Provisions Total funds CF, October ending, INRm Operating profit before working capital changes Debtors and unbilled revenues Loans and advances Current liabilities and provisions Net cash provided by operating activities Purchase of fixed assets Net cash used in investing activities Dividend paid including dividend tax Net cash provided by financing activities Cash and cash equivalents at end of the period FCF (Operating Cash Flow - CAPEX) FY07 17,606 4,419 918 1,442 2,044 1,983 183 1,801 8.6 11.6% 11.6% 10.2% 2,082 7,935 28 10,112 2,518 2,710 4,210 1,892 11 1,592 1,949 1,049 10,112 2,929 (1,430) (202) 774 1,668 (1,717) (1,646) (225) 1,893 (48) FY08 24,230 5,494 953 1,716 2,791 2,661 109 2,552 12.2 16.5% 11.5% 10.5% 2,087 9,421 57 11,626 3,633 2,449 5,802 953 3 2,956 3,026 1,404 11,626 4,006 (1,710) (758) 1,091 2,011 (2,416) (2,302) (631) 953 (405) FY09x 19,065 4,810 728 1,192 2,879 3,097 143 2,954 14.1 20.1% 15.1% 15.5% 2,089 12,213 54 14,417 4,136 2,959 8,810 546 2 3,357 4,240 1,498 14,417 4,005 (2,849) 19 660 1,598 (1,260) (1,204) (787) 546 339 FY09e 41,194 12,723 1,829 2,682 8,204 8,492 595 7,897 37.6 24.8% 19.9% 19.2% 2,090 20,072 44 22,246 3,705 2,911 2,191 9,430 4,647 1 5,242 4,921 1,452 22,246 10,478 (606) (1,226) 632 8,292 (1,747) (3,847) (839) (498) 4,647 6,545 FY10e 45,209 14,015 2,034 2,939 9,042 9,677 1,548 8,128 38.7 24.8% 20.0% 18.0% 2,090 26,973 44 29,147 3,569 2,911 2,191 10,156 11,164 1 5,242 5,128 1,452 29,147 11,847 (727) 207 9,779 (2,034) (2,034) (1,227) (1,227) 11,164 7,745 FY11e 50,634 16,203 2,279 3,291 10,633 11,603 2,553 9,051 43.1 25.0% 21.0% 17.9% 2,090 34,551 44 36,724 3,569 2,911 2,191 11,375 17,866 1 5,242 5,471 1,452 36,724 13,629 (1,219) 343 10,201 (2,025) (2,025) (1,473) (1,473) 17,866 8,175

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

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

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MphasiS profile
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

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.

Non-II 19%

II 20%

EDS 61%

Other members of the executive team include Susanto Banerjee, CFO.

History

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.

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).

8 October 2009 ending

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MphasiS at a glance
Revenue profile (2QFY09 April ending quarter) Revenue profile (Services break-up, 2QFY09)
KP 4% IM S 14% AM 33%

Non-related party 28% EDS 44% EDS partnership and other related party 28%
Customer Serv ice 8% TP S 5%

S/ T HD 7%

AD 32%

Source: Company data, HSBC

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)

H&P 7% L &T 6 % M&R 13% BFSI 4 0%

Revenue profile (Geographic break-up, 2QFY09)

APAC 5. 4%

M E&I 5. 9%

Europe 20.4%

Telec om 12% T & OEMs 24%

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

NA 70.6%

Source: Company data, HSBC

Revenue growth trends

25% 20% 15% 10% 5% 0% 2Q07 4Q07 2Q08 4Q08 2Q09x 2Q09

EBIT margin trends

25. 0% 20. 0% 15. 6% 15. 0% 10. 0% 5. 0% 0. 0% FY06 F Y07 1Q08 2Q08 3Q0 8 4Q08 1 Q09x 2Q0 9x 1Q09 12. 12. 11.6 % 7% 3% 1.5% 1 1 1.2% 9 .9% 21 .5%

21. 6%

15 .8%

2 Q0 9*

Rev enues (USD)

T ota l Employ ees

Source: Company data, HSBC

Source: Company data, HSBC

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HSBC Global Research website

To maximise your access to HSBC Global Research please visit our website at www.research.hsbc.com where you can:
View the latest research and access archived reports Visit the dedicated product pages, including Emerging Markets and Climate Change Filter estimates for more than 1,000 companies under equity coverage Set up personal filters to put your research interests at your fingertips Look up HSBC research analyst contact details

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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) Underweight (Sell) 39% 27% (32% of these provided with Investment Banking Services) (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
Source: HSBC

MBFL.NS

325.55

04-Jun-2009

1 2 3 4 5 6 7 8 9 10 11

HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months. At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. As of 30 April 2009 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 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. 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. 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. A covering analyst/s has received compensation from this company in the past 12 months. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. 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. 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 2 3 This report is dated as at 05 June 2009. All market data included in this report are dated as at close 03 June 2009, unless otherwise indicated in the report. 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 Issuer of report 'UAE' HSBC Bank Middle East Limited, Dubai; 'HK' The Hongkong and Shanghai Banking HSBC Securities and Capital Corporation Limited, Hong Kong; 'TW' HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Markets (India) Private Limited Securities (Canada) Inc, Toronto; HSBC Bank, Paris branch; HSBC France; 'DE' HSBC Trinkaus & Registered Office 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 52/60 Mahatma Gandhi Road Egypt S.A.E., Cairo; 'CN' HSBC Investment Bank Asia Limited, Beijing Representative Office; The Fort, Mumbai 400 001, India Hongkong and Shanghai Banking Corporation Limited, Singapore branch; The Hongkong and Telephone: +91 22 2267 4921 Shanghai Banking Corporation Limited, Seoul Securities Branch; HSBC Securities (South Africa) Fax: +91 22 2263 1983 (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 Website: www.research.hsbc.com Menkul Degerler A.S., Istanbul; HSBC Mxico, S.A., Institucin de Banca Mltiple, Grupo Financiero HSBC, HSBC Bank Brasil S.A. - Banco Mltiplo, HSBC Bank Australia Limited, HSBC Bank Argentina S.A., HSBC Saudi Arabia Limited. 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 Telecoms, Media & Technology Research Team

Global Stephen Howard Analyst, Global Sector Head +44 20 7991 6820 stephen.howard@hsbcib.com Europe Dominik Klarmann Analyst +49 211 910 3720 Asia Steven C Pelayo Analyst +852 2822 4391 Tse-yong Yao Analyst +852 2822 4397 dominik.klarmann@hsbc.de Tucker Grinnan Analyst +852 2822 4686 Walden Shing Analyst +852 2996 6751 Carlos Dimas Analyst +813 5203 3814 Neale Anderson Analyst +813 5203 3826 Henry Lee Associate +813 5203 4412 Wanli Wang Analyst +8862 8725 6020 Christine Wang Analyst +8862 8725 6024 Leo Tsai Associate +8862 8725 6022 richard.dineen@us.hsbc.com Percy Panthaki Analyst +91 22 2268 1240 Rajiv Sharma Analyst +91 22 2268 1239 Yogesh Aggarwal Analyst +91 22 2268 1246 Suran Seong Analyst +822 3706 8753 stevenpelayo@hsbc.com.hk tse-yongyao@hsbc.com.hk

Nicolas Cote-Colisson Analyst +44 20 7991 6826 nicolas.cote-colisson@hsbcib.com Luigi Minerva Analyst +44 20 7991 6928

tuckergrinnan@hsbc.com.hk

luigi.minerva@hsbcib.com

waldenshing@hsbc.com.hk

Thorsten Zimmermann Analyst +49 211 910 2852 thorsten.zimmermann@ hsbctrinkaus.de Manish Beria, CFA Analyst +91 80 3001 3796 Amit Sachdeva Analyst +91 80 3001 3795 Dhiraj Saraf, CFA Analyst +91 80 3001 3773 Sunil Rajgopal Analyst +91 80 3001 3794 Americas Richard Dineen Analyst +1 212 525 6707

carlos.dimas@hsbc.co.jp

manishberia@hsbc.co.in

neale.anderson@hsbc.co.jp

amit1sachdeva@hsbc.co.in

henry.lee@hsbc.co.jp

dhirajsaraf@hsbc.co.in

wanliwang@hsbc.com.tw

sunilrajgopal@hsbc.co.in

christineccwang@hsbc.com.tw

leocytsai@hsbc.com.tw

Gabriel E. Gonzalez Media +52 55 5721 2580 gabriel.e.gonzalez@hsbc.com.mx Europe & North America Credit Research Madeleine King, CFA Analyst +44 20 7991 6789 madeleine.king@hsbcib.com

percypanthaki@hsbc.co.in

rajivsharma@hsbc.co.in

yogeshaggarwal@hsbc.co.in

Specialist Sales
Timothy Maunder-Taylor +44 20 7991 5006 tim.maunder-taylor@hsbcib.com Annabelle O'Connor +44 20 7991 5040 annabelle.oconnor@hsbcib.com Thomas Koenen +49 211 910 4402 Myles McMahon +852 2822 4676 thomas.koenen@trinkaus.de mylesmacmahon@hsbc.com.hk

suranseong@kr.hsbc.com

Global Emerging Markets (GEMs) Herv Drouet Analyst +44 20 7991 6827 herve.drouet@hsbcib.com Emerging Europe, Middle East & Africa (EMEA) Kunal Bajaj Analyst +971 4507 7200 kunalbajaj@hsbc.com Vangelis Karanikas Analyst +30 210 696 5211 vangelis.karanikas@hsbc.com Avshalom Shimei Analyst +972 3 710 1197 Blent Yurdagl Analyst +90 212 376 46 12 Sergey Fedoseev Analyst +44 20 7991 6831

avshalomshimei@hsbc.com

bulentyurdagul@hsbc.com.tr

sergey.fedoseev@hsbcib.com