Maintain BUY on Mphasis - Sprinting ahead - HDFC Securities

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

We maintain a BUY rating on Mphasis, based on stellar deal wins providing higher revenue visibility (growth in FY21) and a stable operating profile (improving business-mix towards Direct Core). We expect Mphasis to outperform peers based on the following: (1) robust large deal wins (>USD 100mn TCV-2-year BFSI win in 1Q and USD 216mn TCV-3-year existing logo win) to propel Direct Core growth in 2Q-3Q; (2) new logo and Blackstone-channel traction continues (>40% YoY in 1QFY21); (3) strong and diversified BFSI portfolio supported by growing Digital Risk segment; (4) MRC to restrict the near-term impact on DXC business; (5) improving business-mix to support margins (guidance of 15.5 to 16.5% EBIT margin for FY21E). Mphasis' valuation discount to mid-tier IT is expected to compress, supported by an improving mix of high-growth Direct Core limiting the impact from DXC and on FCF yield >7.5%. Our target price is Rs 1,280, 16x (15x earlier and 5-year average at 15x) Jun-22E EPS, following ~6% EPS estimate increase for FY22E.

- 1QFY21 highlights: (1) Revenue growth of -4.6/+3.8% QoQ/YoY (CC terms) was led by Direct Core at -2.1/+6.9% QoQ/YoY (CC terms) and DXC at -15.8/- 14.3% QoQ/YoY (CC terms). (2) EBIT margin came in at 15.7%, -67/+18bps QoQ/YoY. (3) Deal wins in Direct International was strong at USD 259mn (highest-ever EN+NN wins).

- Outlook: We have factored 2.7/10.1% growth in revenue based on Direct Core growth at 11.1/16.2% and DXC at -30/-10% for FY21/22E respectively; factored EBIT% at 16.0/17.0% for FY21/22E resulting in 10% EPS CAGR over FY20-22E. Key downside risks remain steeper decline in DXC.

Shares of MPHASIS LTD. was last trading in BSE at Rs.1128.8 as compared to the previous close of Rs. 1118.7. The total number of shares traded during the day was 125365 in over 9742 trades.

The stock hit an intraday high of Rs. 1206.3 and intraday low of 1073.8. The net turnover during the day was Rs. 144593106.

Source : Equity Bulls

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