Maintain ADD on Mphasis - Positives outweigh the risks - HDFC Securities

Mr. Apurva Prasad & Mr. Amit Chandra, Institutional Research Anayst, HDFC Securities.

Mphasis (Q4FY20): Positives outweigh the risks. Maintain ADD
(TP Rs 825, CMP Rs 803, MCap Rs 150bn)


Maintain ADD on Mphasis supported by in-line 4Q rev and operating performance. Despite DXC-HP portfolio underperformance & uncertainty, (1) Continuity of strong growth vectors in Direct Core, (2) Industry tailwinds in Digital Risk, and (3) Attractive valuations (11.7x FY22E with FCF yield >10%, Dividend yield >4% and RoIC >25%) support our constructive stance. Our TP of Mphasis is Rs 825, at 12x FY22E EPS.

Strong deal wins in Direct International: Mphasis' revenue growth was +1.5/11.1% QoQ/YoY CC, supported by (1) Strong growth in Direct Core at +2.6/13.6% QoQ/YoY, (2) DXC-HP channel posting -1/+2.1% QoQ/YoY CC, and (3) Digital Risk growing 3.5% QoQ. 4Q TCV bookings of Direct International was USD 201mn, +6.3/53.4% QoQ/YoY (16.1% in FY20), 79% of 4Q TCV were in new-gen areas, increase in share of large deals (>USD 25mn) and improving annuity.

Direct Core outperformance to continue: For FY20, rev growth was 11.7% CC with Direct Core growth at 15.4% CC, Digital Risk growth at 7% and DXC-HP channel growth at 7.5% CC. Within Direct Core, apart from the strategic accounts, new logo wins and Blackstone portfolio (growing 40-50% YoY) are contributing to the overall Direct Core growth. USD 5mn+ client bucket and USD 1mn+ client bucket expanded to 31 and 76, respectively (up from 27 & 64 in FY19) in Direct International.

DXC-HP uncertainty persists, but downside protected: DXC-HP channel has decelerated following a stellar growth over FY17-19. Geo diversification, industry focus and strategic partnership are expected to support the revenue run-rate. The downside is protected with the residual minimum revenue commitment of USD 300mn for the next 6 qtrs within DXC (88% of DXC-HP channel); we have factored USD 465mn for next 6 qtrs (vs. USD 500mn posted in trailing 6 qtrs).

Operational resilience & improved cash conversion: EBIT% came in-line at 16.3%, +10bps QoQ. APAT at Rs 3.11bn (adj. for one-time income tax benefit of Rs 0.42bn) was supported by higher other income. DSO (including unbilled) reverted to 73 days following a spike in FY19 supporting improvement in cash generation with OCF-EBITDA/FCF-APAT at 80/105% in FY20, respectively (vs. 72/65% in FY19). Dividend payout improved to 55% in FY20 (vs. 48% in FY19).

Valuation and view: We've factored flat revenue in FY21 and rebound to +8.8% in FY22 with Direct Core growth at +2.3/13.3%, Digital Risk growth at +12.1/7.4% and DXC-HP at -7.5/+0.6% for FY21/22. Factored margin drop of 120bps for FY21 with EBIT% at 14.8/16.0% for FY21/22. Mphasis trades at an attractive valuation of 11.7x FY22E (vs. 13x 10-yr avg.).

Shares of MPHASIS LTD. was last trading in BSE at Rs.804.45 as compared to the previous close of Rs. 803.3. The total number of shares traded during the day was 16405 in over 1491 trades.

The stock hit an intraday high of Rs. 834.55 and intraday low of 790.9. The net turnover during the day was Rs. 13251887.

Source : Equity Bulls

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