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Mphasis - 2QFY22 Result Update - Growth Resiliency Continues; Raise Target Price - Reliance Research

Posted On: 2021-10-23 14:50:25 (Time Zone: IST)


Beat on Both Revenue and Margin Fronts

Mphasis (MPHL) reported 2QFY22 revenue at Rs28.7bn, which was 1.5% above our estimate of Rs28.3bn. Constant currency growth rate came in at 6.6% QoQ vs. our estimate of 5.7% QoQ. Revenue from direct channel (92% of revenue) grew by a strong 9.9% QoQ in CC, while the revenue from DXC business declined by 24.5% QoQ in CC. DXC contributes a mere 6% to the revenue now. EBIT margin stood at 15.1% (adjusted EBIT margin of 15.8%), which was below our estimate of 15.5%. Net income came in at Rs3.42bn, 0.3% ahead of our estimate of Rs3.40bn, driven by a revenue growth outperformance. New TCV wins in direct business came in at US$241mn, with 68% of the deal wins in the new generation services vs. US$505mn in 1QFY22. The company targets an industry-leading FY22 revenue growth in the direct business, and expects a strong 3QFY22 with minimal impact of seasonality. We prefer MPHL given its industry-leading revenue growth rate over FY22-FY24, driven by the strong direct business, reducing share of DXC business, and an expanding EBIT margin. At CMP, the stock trades at 30.5x FY24 consensus EPS, which is at ~20% discount to Mindtree. We revise our FY22E-FY24E EPS estimates by -1.8 to +3.0%, driven by an improved revenue growth visibility and contribution from acquisition. We retain our BUY rating and raise the Target Price to Rs3,590 (vs. the prior Rs3,470), valuing the stock at 32x FY24E earnings.

BFSI & Americas Led Growth

1) Among verticals, the revenue growth was led by BFSI (13.3% QoQ), insurance (2.3% QoQ) and others (2.8% QoQ). 2) Among geographies, revenue growth was particularly strong in Americas (8.8% QoQ) and India (21% QoQ). 3) Revenue contribution (~10 days in 2QFY22) from the new acquisition Blink stood at US$0.9mn. 4) The company added ~841 employees in 2QFY22. 5) During 1HFY22, MPHL added 14 new Fortune 500 clients (10 were by Blink's acquisition).

Acquisition Related Charges to Weigh on FY22E-FY23E EBIT Margin

EBIT margin stood at 15.1% (adjusted EBIT margin of 15.8%) for the quarter, which was below our estimate of 15.5%. The management has already highlighted an EBIT margin dilution of ~100bps over the next 8 quarters due to acquisition related cost (amortization and talent retention cost). We believe a limited margin upside exists for FY22 due to the higher SG&A cost (higher attrition and resumption of offices), and increased hiring over the next two quarters. Company management has retained organic FY22 EBIT margin target of 15.5%-17%. Additionally, as Blink is gross margin accretive, we expect a slightly better profitability in FY24. We estimate an EBIT margin of 15.7-16.8% over FY22E-FY24E.

Outlook and Valuation

We expect MPHL to report FY21-FY24E EPS CAGR of 20%, against FY17-FY20 EPS CAGR of 17%. We believe the company will report an industry-leading double-digit revenue growth rate over FY22E-FY24E. Additionally, DXC business continued to witness a slump and contributed just 6% to MPHL's total revenue in 2QFY22 vs. 23% in 4QFY20. In our view, a substantial reduction in the volatile part of business is encouraging for a consistent growth. At CMP, the stock trades at 29x FY24E EPS, which is at 20% discount to Mindtree. We retain our BUY rating and raise the Target Price to Rs3,590 (vs. the prior Rs3,470), valuing the stock at 32x FY24E earnings. We have shifted to a 1-year target price, from the earlier 2-year. As we enter 2HFY22, instead of rolling forward our valuation, we maintain it based on FY24E earnings and shift to a 1-year target price of Rs3,590.

Link to the report

Shares of MphasiS Limited was last trading in BSE at Rs. 3256.10 as compared to the previous close of Rs. 3396.40. The total number of shares traded during the day was 82136 in over 9928 trades.

The stock hit an intraday high of Rs. 3513.90 and intraday low of 3056.80. The net turnover during the day was Rs. 266878888.00.


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