Mumbai:

Mphasis BFL had in April '04 acquired the south-based software solutions company Kshema Technologies for approximately $21 million. The acquistion was done through a combination of stock and cash. The cash component was about $6.8 million.

Through the acquistion of Kshema, Mphasis its headcount of the IT services business went up from by 305 to 2,300. Mphasis which announced its first quarter results had also taken into account Kshema's numbers for 1 month.

Kshema Technologies acquistion boosted the topline growth for Mphasis. Though Kshema's revenue accounted for about 3 per cent of consolidated revenue for Mphasis in Q1, it is expected that this number will improve in the second quarter as Kshema would contribute 8-9% of Mphasis' consolidated revenue in Q2.

Mphasis added 10 clients (11 new clients in Q4) inQ1FY05 for IT services business.

While the company has expanded its services offering by acquiring companies in niche areas like Kshema, analysts feel that slower organic growth of ITS business (3-4% QoQ over past 3 quarters) is a matter of concern.

Q2FY04 due to increased marketing and sales investment. Mphasis has significantly expanded its sales/marketing team in Q1. It is expected that the company's focus on maintenance revenue will bring stability on revenue front.

Mphasis' ITS revenues are relatively more volatile than frontline Indian IT companies due to higher portion of project revenues and lower maintenance revenue. Frequent ramp-up at the start of the project and ramp-down after completion of project results in volatile capacity utilisation and unpredictability of future revenue.

In the recent past, Mphasis has been focusing on higher maintenance-related assignments to improve revenue visibility. It intends to increase maintenance related revenues to about 50 per cent range over the next 2 years.

The average bill rates for maintenance tend to be lower than that of projects and higher capital expenditure is involved as bulk of the work is done offshore.

Mphasis may experience slight cost increase, as it will need to aggressively build skills on mainframe/legacy systems, while the revenues would kick in later.

According to analysts with Enam Securities, "despite salary revision in April 2004, sharp increase in capacity utilization for IT services business helped Mphasis improve its gross margin."

Also Msource, the BPO business of Mphasis, reported 15 per cent topline growth.