Is Hewlett Packard (HP) slowly smothering MphasiS to buy out minority shareholders in the same way as it did in Digital Globalsoft in 2004?

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The answer seems to be in the affirmative, going by analysts. In their report brought out on Thursday, CLSA analysts Nimish Joshi, Bhavtosh Vajpayee and Arati Mishra have raised concerns over the collapse of corporate governance at the Mumbai-based outsourcing firm to serve HP’s interest.

“MphasiS’ financial performance is now peripheral to the central issue of the shocking collapse in its governance standards,” they wrote in a note to investors.  

“HP has been here before with a similar experience faced by investors in Digital Globalsoft. Post this result, the harm done to not only MphasiS’ but also HP’s reputation is likely to be long lasting. Questions will linger on perhaps for a long time.”

Apparently, in 2003, Digital Globalsoft — then a HP- owned listed entity on the Indian stock exchange — went through a similar phase of massive price cuts from HP before HP ended up buying out the minority shareholders in 2004.

“We see a similar pattern repeating with MphasiS. However, in our view, the latest episode is one too many for HP’s credibility. We also remain intrigued by MphasiS’ decision to announce a stock plan for employees ahead of such poor results. Clearly, HP has steamrolled its own employees’ interests as well and that will likely be a big hurdle in attracting talent in the future,” said CLSA analysts.

What is making the CLSA analysts raise the alarm is the massive price cuts from HP — 68% of total revenues — which has pushed down MphasiS’ dollar revenues 8.5% sequentially to $271 million in the quarter ended January 31. HP’s price discount has also taken a toll on MpahsiS’ profitability with its quarter-on-quarter earnings before interest and tax margins slipping 300 basis points despite provision reversals of Rs43 crore.

Analysts believe margins are likely to be under pressure for a longer period with wage hike cycles, leverage from potential uptick in utilisation notwithstanding.

Concerns of slipping corporate governance are also emanating from the company’s $9 million benefit from one-time revenues last quarter, which it had failed to disclose in the previous quarter.

“Why did MphasiS not disclose the one-off revenues and provision reversals through FY10? Where does the buck stop for holding back key data from investors? We foresee a steady deterioration in financials and valuations as parent company (HP) interests hold sway over minority shareholders,” said Joshi, Vajpayee and Mishra.

Justifying MphasiS’ rate cuts for HP’s clients, Ganesh Murthy, chief financial officer of the company, said customers demanded lower prices during the traditionally weak quarter.

MphasiS cut some rates for HP by 5-10% after some of HP’s customers demanded lower prices, Murthy said.

“We have two types of relationships with HP —- one is as a shareholder and one is as a customer,” said Balu Ganesh Ayyar, chief executive officer of MphasiS, in a press conference on Thursday. “We hold them at arm’s length. We deal with HP exactly the same way as we deal with any other customer. Our track record shows that we’ve held our ground.”