Maintain BUY on Mphasis - Growth vectors intact - HDFC Securities

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

We maintain BUY on Mphasis (MPHL), based on strong growth outlook in Direct International (85% of revenue) and despite the uncertainty around the diminishing DXC portfolio (13% of revenue). Key indicators for Direct International growth are (1) deal pipeline increase by 49% and 9MFY21 net new TCV growth of 68% YoY, (2) increase in large & integrated deal component and broad-based growth (T10 and >USD5mn accounts), (3) acceleration in sub-segments such as Europe geography and Direct-Hi-tech sub-vertical, and (4) recent wins expected to improve the growth prospects of Insurance vertical. Operating performance of MPHL remains consistent within its 15.5-16.5% EBIT band and presents an upward bias with levers such as offshore/utilisation. 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 >5%, ~30% RoIC, FY21-23E EPS CAGR at 16%. Our target price is Rs 1,740, valuing MPHL at 20x Dec-22E EPS.

3QFY21 highlights: (1) Revenue came in at USD 334mn, +1.6/+4.3% QoQ/YoY (CC terms), led by Direct business (85% of revenue) growth at +5.3/+19.0% QoQ/YoY (CC terms), offset by DXC-HP (13% of revenue) de- growth at -18.2/-42.2% QoQ/YoY (CC terms). (2) EBIT margin stood at 16.4%, +25/+13bps QoQ/YoY, supported by better gross margins and APAT stood at Rs 3.26bn, +8.8% QoQ. (3) The management maintained operating margins outlook in the band of 15.5-16.5%; however, higher demand for offshore service might be upside risk to the margin. (4) Deal wins in Direct International were strong at USD 247mn, growing +25% YoY (+59% YoY on TTM basis), which was fourth consecutive quarter of net new TCV>USD 200mn. Pipeline continues to be healthy, which will add revenue visibility, offsetting the risks in DXC portfolio beyond 2QFY22.

Outlook: We have factored in 5.9/13.4/9.8% growth in revenue, based on Direct business growth at 18/20.1/14.1% and DXC-HP at -35.5/-22.5/-25% for FY21/22/23E respectively, and factored in EBIT% at 16.1/16.5/16.5% for FY21/22/23E, resulting in 17% EPS CAGR over FY21-23E.

Shares of MPHASIS LTD. was last trading in BSE at Rs.1587.6 as compared to the previous close of Rs. 1592.5. The total number of shares traded during the day was 14034 in over 1705 trades.

The stock hit an intraday high of Rs. 1603.55 and intraday low of 1545. The net turnover during the day was Rs. 22145404.

Source : Equity Bulls

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