Maintain BUY on Mphasis - Large deal momentum continues - HDFC Securities

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

We maintain BUY on Mphasis (MPHL), based on high visibility in the Direct business and improving portfolio mix (DXC trending lower). Our positive stance is based on (1) consistency in large deal wins (three deals of >USD 100mn+ in five quarters including largest deal of USD 250mn) and an accelerating deal wins trajectory (TCV higher by 51% in FY21), also driven by the increasing size of large deals (2.5x in two years); (2) better client mining (across client bucket and T10), supported by investments in dedicated leadership/teams as well as strong new account openings (increased new logo focus in select verticals); (3) market expansion in Europe/LatAm/Canada through augmenting capabilities in GTM & delivery; and (4) positive commentary on deal funnel replenishment and execution milestones. While the increase in deal tenure may de-link revenue from TCV in the near term, it considerably solidifies the portfolio in the Direct business. Key risk remains higher-than-anticipated decline in DXC portfolio (although the impact is diminishing). Our TP - INR 1,980 - values MPHL at 22x Mar-23E EPS.

4QFY21 highlights: (1) Revenue came in at USD 342mn, +2.0/+4.9% QoQ/YoY (CC terms), led by Direct business (86% of revenue) growth at +3.5/+19.9% QoQ/YoY (CC terms), offset by DXC-HP (12% of revenue) de-growth at -7.7/- 46.2% QoQ/YoY (CC terms). (2) EBIT margin stood at 16.1%,-30/-27bps QoQ/YoY, impacted by deal transition along with investment in S&M. (3) The management upgraded operating margins outlook by 50bps towards the upper end in the range of 15.5-17%. (4) Deal wins in Direct International were flattish QoQ at USD 245mn, growing +21.9% YoY, which was the fifth consecutive quarter of net new TCV>USD 200mn. MPHL closed a large deal in Q1FY22 of TCV USD 250mn (10 year) in the UK region for digital transformation (ramp-up expected in 3Q). (5) MPHL added 1,357 billable headcount during the quarter, which provides revenue visibility for the near term. (6) MPHL plans to expand delivery centers in Mexico, Taiwan, and Costa Rica. (7) The board recommended the final dividend of INR 65 per share, which included a special dividend of INR 27 per share for FY21.

Outlook: We have factored in +12.4/13.2% growth in revenue, based on Direct business growth at +20.8/17.2% and DXC-HP at -34.3/-23% for FY22/23E respectively, and factored in EBIT margin at 16.5/16.8% for FY22/23E, resulting in 17.4% EPS CAGR over FY21-23E.

Shares of MPHASIS LTD. was last trading in BSE at Rs.1801 as compared to the previous close of Rs. 1797.85. The total number of shares traded during the day was 14979 in over 1090 trades.

The stock hit an intraday high of Rs. 1801.4 and intraday low of 1764. The net turnover during the day was Rs. 26696000.

Source : Equity Bulls

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