Maintain BUY on Mphasis - Large deal acceleration - HDFC Securities

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

We maintain BUY on Mphasis (MPHL), following a strong 2Q performance and high growth visibility ahead. We are positive on MPHL, based on (1) large deal wins (TCV of USD 1bn+ TTM new deal wins with highest-ever TCV in 2Q), with the increasing deal size in NewGen/Digital wins and deal pipeline (+75% YoY) providing high growth visibility, (2) strong BFS portfolio driven by consolidation deals in large accounts as well as the mortgage segment, (3) services re-alignment, integrated deals (Apps, IMS, BPM) and the focus on hyperscaler partnerships have supported 3x growth in cloud deal pipeline (27% and 60% of cloud pipeline includes AWS/Azure channel), and (4) increased focus in Europe geography. MPHL's valuation discount to mid-tier IT is expected to reduce, supported by an improving mix of high-growth Direct business limiting the impact from DXC and on FCF yield >6%, ~30% RoIC, FY20-23E EPS CAGR at 14% (16.5% over FY21-23E). Our target price of Rs 1,655 is valued at 20x Sep-22E EPS.

2QFY21 highlights: (1) Revenue came at USD 327mn, +6.0/+6.7% QoQ/YoY (CC terms), led by Direct business (82% of revenue) growth at +10.9/+18.4% QoQ/YoY (CC terms), offset by DXC-HP (16% of revenue) de-growth at - 15.5/-28.9% QoQ/YoY (CC terms). (2) EBIT margin stood at 16.1%, +45/+3bps QoQ/YoY, supported by better gross margins (higher offshore) and APAT stood at Rs 2.99bn, +8.8% QoQ. (3) Deal wins in Direct International were strong at USD 360mn (the highest-ever including USD 216mn TCV signed in Jul-20).

Outlook: We have factored 7.0/13.6/9.2% growth in revenue, based on Direct business growth at 18/20/14% and DXC-HP at -32/-22/-27% for FY21/22/23E respectively and factored in EBIT% at 16.1/16.2/16.4% for FY21/22/23E, resulting in 14% EPS CAGR over FY20-23E.

Shares of MPHASIS LTD. was last trading in BSE at Rs.1356 as compared to the previous close of Rs. 1381.7. The total number of shares traded during the day was 4470 in over 664 trades.

The stock hit an intraday high of Rs. 1378.1 and intraday low of 1351. The net turnover during the day was Rs. 6100969.

Source : Equity Bulls

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