Mphasis (MPHL) reported 4QFY22 revenue at Rs32.8bn, which was 0.5% above our estimate of Rs32.6bn. Constant currency growth rate came in at 4.3% QoQ vs. our estimate of 4.7% QoQ. Revenue from direct channel (93% of revenue) grew by 4.7% QoQ in CC, while the revenue from DXC business grew by 1% QoQ in CC. Currently, DXC contributes merely 5% to the revenue. EBIT margin stood at 15.2%, which was slightly above our estimate of 15%. Net income came in at Rs3.9bn, 4% higher than our estimate of Rs3.8bn. New TCV wins in direct business came in at US$347mn, with 72% of the deal wins in the new generation services vs. US$335mn in 3QFY22. The company targets an industry leading FY23 revenue growth in the direct business. We prefer MPHL given its industry-leading revenue growth rate over FY23-FY24, driven by strong direct business and reducing share of DXC business and a stable EBIT margin. At CMP, the stock trades at 24.5x FY24E EPS, which is at ~14% discount to Mindtree. We broadly maintain our FY23E-FY24E EPS estimates, driven by an improved revenue growth visibility. We retain our BUY rating and revise the Target Price to Rs3,250 (vs. earlier Rs3,780), valuing the stock at 28x (earlier 32x) FY24E earnings.
Insurance & Americas Led Growth
Among verticals, the revenue growth was led by Insurance (13.7% QoQ), Logistics & Transportation (6.1% QoQ) and TMT (5.4% QoQ). 2) Among geographies, the revenue growth was particularly strong in Americas (82% YoY) and EMEA (11% YoY). 3) The company added ~1,619 employees in 4QFY22. 5) The company hired ~5,500 freshers in last 2 quarters and plans strong hiring over next year.
EBIT Margin Pressure to Continue in FY23E
EBIT margin stood at 15.2% for the quarter, which was higher than our estimate of 15%. The management has already highlighted an EBIT margin impact of ~100bps over the next 8 quarters due to acquisition related cost (amortization and talent retention cost). The management has retained organic FY23 EBIT margin guidance of 15.25%-17%. Additionally, as Blink is gross margin accretive, we expect a slightly better profitability in FY24. We estimate an EBIT margin of 15.9-16.5% over FY23E-FY24E.
Outlook and Valuation
We expect MPHL to report FY22-FY24E EPS CAGR of 23%, against FY18-FY21 EPS CAGR of 15%. We believe the company will report an industry-leading double-digit revenue growth over FY22-FY24E. Additionally, DXC business continued to witness a slump and contributed just 5% to MPHL’s total revenue in 4QFY22 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 24.5x FY24E EPS, which is at ~14% discount to Mindtree. In line with our downward revision in valuation multiple of IT sector to factor in lower pace of revenue growth ahead, we reduce our P/E multiple for MPHL from 32x to 28x. In view of industry leading revenue growth strong deal pipeline, new order wins, reducing contribution from volatile business of DXC and attractive valuation post recent sharp correction, we retain our BUY rating and revise the Target Price to Rs3,250 (vs. the prior Rs3,780), valuing the stock at a revised valuation of 28x (vs. the prior 32x) on FY24E earnings.
Shares of MphasiS Limited was last trading in BSE at Rs. 2740.90 as compared to the previous close of Rs. 2842.20. The total number of shares traded during the day was 13566 in over 1268 trades.
The stock hit an intraday high of Rs. 2823.60 and intraday low of 2732.50. The net turnover during the day was Rs. 37470128.00.