Mphasis - Deal win momentum continued to be impressive - ICICI Securities

We anticipated an improvement in the business prospects of some sub-verticals like capital markets to augur well for Mphasis (refer our recent note). Our thesis played out during Sep'20 with BCM revenues reporting robust growth of 17% QoQ (USD). Growth mix during Q2FY21 (Direct: +10.9%, DXC: -15.5%; QoQ, CC) yet again brings to the fore the point that concerns around DXC are overblown. Potential visibility beyond Sep'21E on back of expected strong business and operational realignment generates a positive surprise. Deal win momentum continued to be impressive (US$360mn/259mn TCV in Sep'20/Jun'20). Mphasis reported a robust increase (~75% YoY) in the deal pipeline. Ramp-up of these large deals provides strong growth visibility over the medium term (FY20-FY23E CAGR = 10.1%, USD). In conjunction with a healthy payout ratio (~55%), the stock is attractively priced (17x FY22E EPS). We maintain BUY on Mphasis with a revised price target of Rs1,885 (earlier Rs1,820).

- Sharp decline in DXC more than offset by robust growth in Direct revenues: Gross revenues grew 6% QoQ (CC), ahead of our expectation of 3.5%. The better than expected performance was driven by a robust increase in direct revenues (+10.9% QoQ, CC). Across verticals, Banking & Capital Markets (+17% QoQ, USD) was the key growth driver. Other key verticals reported either sharp declines (e.g. ITCE, Logistics & Transportation) or tepid growth (e.g. Insurance). Sharp revenue decline in DXC channel (-15.5% QoQ, CC) was a key overhang on reported performance.

Contrary to the general trend during the quarter, utilisations of Mphasis dipped (from 82% to 80%), in line with the strategy of investing in talent. Accordingly, even as gross margins expanded 150bps QoQ, the benefit was largely offset by rise in G&A expenses.

- Deal win momentum and pipeline continued to be robust: Company announced Direct TCV wins worth US$360mn, including one large deal with TCV > US$200mn. 73% of these deal wins came from new-gen areas with increased deal sizes. In addition, Mphasis hinted at 75% YoY increase in the deal pipeline. Strong business and operational realignment in DXC relationship was indicated with potential visibility beyond Sep'21E. On margins, Mphasis reiterated its intent to invest back in the business. Accordingly, we don't see material headroom for margin expansion.

- Strong growth at reasonable valuations: As highlighted in our recent note (link), even as the risk of further reduction in DXC revenues exists, we expect incremental revenues from Blackstone portfolio / strong deal win momentum in Direct to be an effective hedge. Ramp-up of recently-won large deals provides strong growth visibility over the medium term (FY20-FY23E CAGR of 10.1%, USD). In conjunction with a healthy DPR (~55%), the stock is attractively priced at 17x FY22E EPS.

Shares of MPHASIS LTD. was last trading in BSE at Rs.1381.7 as compared to the previous close of Rs. 1352.65. The total number of shares traded during the day was 25910 in over 3359 trades.

The stock hit an intraday high of Rs. 1412 and intraday low of 1374.15. The net turnover during the day was Rs. 35991228.

Source : Equity Bulls

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