A decline of about 9% in US dollar revenues in a buoyant economic environment has come as a surprise, especially when MphasiS, a unit of HP, was on a steady growth path for the last several quarters

MphasiS shares tumbled by about 28% to Rs454.10 on Friday following a fall in the first quarter net profit which was below market expectations.

The company was quickly downgraded by IDFC Securities from 'outperformer' to 'underperformer' on account of the disappointing results. There are some unexplained U-turns in the company's first quarter results that raise certain questions, the brokerage said in a research report.

"A decline of about 9% in US dollar revenues in Q1 in a buoyant economic environment was surprising especially when the company was on a steady growth path over the last several quarters (5.8% and 5.4% CQGR for the last four quarters and eight quarters, respectively)," IDFC stated in the report. "The company had not indicated any challenges on the growth front at the recent analysts' meet; on the contrary, it spoke about 2,400 open positions in applications/ ITO as of October 2010 end."

For the first quarter to end-January, the IT and BPO company reported a fall in net profit at Rs226.70 crore even as its total revenues increased to Rs1,233.50 crore from the corresponding period a year ago. During the quarter, MphasiS, which is majority-owned by Hewlett-Packard Co, reported a 10% fall in HP channel revenues to Rs840 crore, while its direct channel revenues declined 3% to Rs380 crore. The company's days sales outstanding (DSO) increased significantly to 94 days from the historical range of 70-80 days.

MphasiS follows a fiscal year from November through October, in line with the practice at H-P, which acquired MphasiS' parent Electronic Data Systems Corp. in May 2008. Hewlett-Packard also reported lower-than-expected results for the first quarter to end-January. The company registered a 4% increase in revenues at $32.3 billion from $31.1 billion a year ago. Mphasis derives more than 85% revenue from ITO and application services, and both these businesses have been weak in the case of HP.

IDFC said, MphasiS has reduced disclosure levels. It has stopped reporting revenues/segment profits by earlier segment definitions (application, ITO and BPO) and instead now presents segment reporting by verticals. The company has also stopped reporting other details like revenues by geographies and billing rates.

"Whether quarter-on-quarter (q-o-q) decline is a change in growth trajectory or just a quarterly hiccup is still debatable. However, even a quarterly hiccup warrants significant cuts in earnings per share (EPS)-we reduce our Oct-11 estimated (E) EPS by about 18% and Oct-12E EPS by around 14%-despite building a 6% compounded quarterly growth rate (CQGR) for the next seven quarters. We now value MphasiS at Rs610, based on 14x Oct-11E EPS (from Rs850 based on 15x Oct-11E EPS). We do not roll forward earnings and reduce our target multiple by a notch to account for the reduced confidence on business growth. Downgrade MphasiS stock to underperformer," the brokerage stated.

The MphasiS stock closed the day at Rs448.40 on the Bombay Stock Exchange, down 28.43%, while the benchmark Sensex was up 0.4% at 17,700 points today.