Analysis_of_Mphasis

FINANCIAL MANAGEMENT II ASSIGNMENT 1 Submitted by : Raja Sugirtha.R (10AC23) MPHASIS LIMITED: Mphasis 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). Jeya Kumar is CEO of MphasiS, which has a staff strength of 27,000 people. For the year ended the MphasiS Group recorded revenues of Rs 2,423 crore (Rs 24.23 billion), a growth of Rs 662 crore, which is 38 per cent over the previous year. FINANCIAL POSITION: |Year |2006 |2007 |2008 |2009 |2010 | |Net Sales |1,102.85 |1,703.56 |1,451.55 |3,405.02 |3,770.09 | |Variable cost |340.53 |521.1 |506.91 |1039.85 |1296.72 | |Contribution |762.32 |1,182.46 |944.64 |2,365.17 |2,473.37 | |Fixed cost |562.1 |866.4 |628.21 |1407.4 |1375.29 | |EBDIT | |200.22 |316.06 |316.43 |957.77 |1098.08 | |Depreciation | |51.25 |86.95 |69.09 |137.03 |115.79 | |EBIT |148.97 |229.11 |247.34 |820.83 |982.29 | |Interest | |1.45 |0.61 |0.97 |5.91 |1.64 | |EBT | |147.52 |228.50 |246.37 |814.83 |980.65 | VARIABLES CONSIDERED: |Year |2006 |2007 |2008 |2009 |2010 | |DOL |5.11 |3.74 |2.98 |2.47 |2.52 | |DFL |1.01 |1.002 |1.003 |1.007 |1.002 | |DCL |5.16 |4.74 |2.99 |2.49 |2.52 | |D/E RATIO |0.008:1 |0.023:1 |0.022:1 |0.6:1 |0.004:1 | |EPS |8.02 |10.58 |12.66 |39.93 |47.48 | ANALYSIS: • The operating leverage of the company can be observed to decrease over the span of five years. It has reduced from 5.11 to 2.52. This shows that the business risk of the firm is low i.e the impact of the level of sales on the operating profit is relatively low. This can be attributed to the level of fixed asset of the company. • The financial leverage of the firm is observed to be almost constant at an optimal value of 1. Therefore the financial risk of the firm is very low. The debt component determines the financial risk of the firm which is very low for Mphasis. The company relies more on equity capital and very low debt. During 2009, a steep increase in the raise of the capital can be observed. Both the equity capital and debt was increased. • DCL gives the overall riskiness of the firm i.e the percentage change in EPS for every 1% change in Sales. When we observe we should say that the company has strived to bring down its risk. The risk value which has gradually reduced through the five years remains at 2.52 as of 2010. • The capital structure of the company has always been in favour of equity capital. The capital structure is selected based on the profitability of the shareholders. Therefore the highest EPS value is for the year 2010 with the D/E ratio 0.004:1. The average D/E ratio of Software Industry is 0.26:1 • The company shows very high growth. The profit has increased 9 times since 2005. This is mainly due to its investment in 2009. PUNJ LLOYD: Crowned as 'all-terrain specialists', Punj Lloyd is one of the biggest Indian engineering construction firms. The company performs its operations in Asia Pacific, China, Middle East, Europe, Africa, South Asia and Caspian. It provides services ranging from engineering to project administration, innovative designs to construction, to eminent clients like Petroleum Development Oman, British Petroleum, Pertamina, Shell, ADNOC, Cairn Energy, etc. FINANCIAL POSITION: |Year |2006 | |2007 |2008 |2009 |2010 | |Net Sales |1,368.21 | |2,238.85 |4,511.10 |6,919.87 |7,116.70 | |Variable cost |866.67 | |1321.54 |3615.61 |5525.6 |6027.81 | |Contribution |501.54 | |917.31 |895.49 |1394.27 |1088.89 | |Fixed cost |289.56 | |590.1 |358.53 |594.52 |704.62 | |EBDIT | |211| |327.18 |536.96 |772.19 | | | |.92| | | | | |Interest | |125.99 | |208.26 |113.28 | |DOL |2.99 |3.78 |2.11 |2.13 |4.32 | |DFL |4.01 |7.04 |1.36 |1.42 |- | |DCL |11.99 |26.61 |2.86 |3.02 |- | |D/E RATIO |7.83:1 |29.06:1 |22.53:1 |48.39:1 |52.74:1 | |EPS |6.73 |2.36 |7.30 |10.58 |11.06 | ANALYSIS: • The operating leverage of the firm is highly fluctuating and it is the highest in the year 2010. This is because the firm could not manage its cost of production. Being a construction firm, it relies heavily on the input cost. Both the variable cost and fixed cost is observed to be very high over the years. • In general the Construction sectors deploy more of debt capital. Therefore the financial risk is generally high. The financial risk was very high up to 7 in the initial two years, but reduced comparatively later. But in the year 2010 the other Income of the firm exceeded the Income from the operations thus increasing the financial risk once again. The debt is also high in 2010. • The overall risk of the firm has reduced over the period. It maintains around 2-3 in the last three years. This is a good improvement over its risk of 26 in 2007. • In the year 2007, may be due to some new contract, the investment was almost doubled. The debt acquired was doubled thus bringing its D/E ratio to 29:1 from 7:1. Since then D/E ratio has always been in favour of debt. At present it is 52:1, with a meagre amount of the investment funded through equity capital. • The company has shown increased profits after the increase in investment that is clearly reflected in the EPS. But the point of concern is that a major portion of the income is not through its operation process but through other income investments. COMPARISON: |MPHASIS | | | | | | | | | | | | | |DOL |5.11 |3.74 |2.98 |2.47 |2.52 | |DFL |1.01 |1.002 |1.003 |1.007 |1.002 | |DCL |5.1611 |3.74748 |2.98894 |2.48729 |2.52504 | | | | | | | | | | | | | | | |PUNJ LLOYD | | | | | | | | | | | | |DOL |2.99 |3.78 |2.11 |2.13 |4.32 | |DFL |4.01 |7.04 |1.36 |1.42 |- | |DCL |11.9899 |26.6112 |2.8696 |3.0246 |- | ✓ The two sectors under comparison are Software Industry and Construction Sector, which vary widely in their strategies and business structure. ✓ The Software Industry does not require more capital for raw material or input, its main cost will be the Employee cost and administrative expenses. Therefore it does not require very high investment in the beginning itself and these firms prefer low financial risk since the risk of failure of a project is quite high. ✓ The business risk of Software firms is very high. This could be attributed to the nature of their product since its success is not determined until the end consumer uses it. ✓ The construction sector on the other hand, follow very high financial risk since the initial investment required for a project is very high. This is mostly raised through debt in the form of term loans. But the business risk of these firms is comparatively lower when the firms operate effectively. ✓ Therefore Mphasis has very low financial risk almost maintained constantly at 1. But Punj Lloyd on the other hand due to high debt shows greater fluctuations in DFL. ✓ The business risk of Mphasis though is high compared to Punj Lloyd, it has increased the efficiency of its operations and brought it down on par with Punj Lloyd. While Punj Lloyd has shown an increase in the business risk in the year 2010. ✓ Both the companies perform well in terms of operating profit while Mphasis has a slight edge over Punj Lloyd. During the year 2010, though Punj Lloyd has shown high income and EPS to shareholders it is important to note that a major share of this profit is from other income. Therefore the credibility for future operational efficiency is doubtful.