Maintain BUY on Mphasis - Ticking all the boxes - 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) and reiterate it as our preferred pick in mid-tier IT, given a stellar Q1 and high visibility on delivering industry-leading growth. MPHL's growth is expected to be driven by (1) the highest-ever deal signings with USD 505mn new total contract value (TCV) wins in the direct international business, (2) continuity of strong growth in large accounts, (3) increased focus on new client acquisition and investments in sales & delivery, (4) positive commentary on deal funnel replenishment and execution milestones, and (5) steady operating profile (margin guidance maintained). The deal trajectory solidifies the direct portfolio, which is expected to post 30% in FY22 (23% CAGR over FY21-24E). MPHL's scalability is becoming more apparent with quadrupling of the USD 100mn+ client bucket and delivering of the strongest growth vs. peers in T10 accounts. DXC contraction is becoming a smaller deterrent to the overall portfolio (than previously). Our target price is INR 2,870, which values MPHL at 28x Jun-23E EPS.

Q1FY22 highlights: (1) Revenue came in at USD 363mn, +5.9/+16.3% QoQ/YoY (CC terms), led by growth of +9.8/+32.5% QoQ/YoY (CC terms) in the direct business (89% of revenue), offset by DXC-HP (9% of revenue) de-growth of - 18.2/-48.7% QoQ/YoY (CC terms). (2) EBIT margin stood at 15.9%, in line with our estimates, -19/+21bps QoQ/YoY, impacted by lower gross margin (COVID-related expense and higher employee cost). (3) The management has maintained its operating margin guidance of 15.5-17% and expects industry-leading growth in the direct business for FY22E. (4) Deal wins in direct international doubled QoQ to USD 505mn, which included a large deal of TCV USD 250mn in the BFSI vertical (ramp-up expected in Q3FY22). Excluding the large deal in Q1, new TCV remained strong at >USD 250mn, leading to a sustained strong growth outlook for the direct business ahead. (5) MPHL added 1,716 billable headcount in the quarter, compared to 1,360 added in Q4FY21 (2,888 in FY21). (6) The top 5/10 clients witnessed healthy growth of 9.2/10.6% QoQ during the quarter.

Outlook: We have factored in 18/17/16% growth in revenue, based on the growth in the direct business at 30/21/17% and DXC-HP at -44/-29/-13% for FY22/23/24E respectively, and factored in the EBIT margin at 15.8/16.8/18.0% for FY22/23/24E, resulting in an EPS CAGR of 23% over FY21-24E.

Shares of MPHASIS LTD. was last trading in BSE at Rs. 2596 as compared to the previous close of Rs. 2590.15. The total number of shares traded during the day was 30949 in over 3664 trades.

The stock hit an intraday high of Rs. 2618.4 and intraday low of 2562.75. The net turnover during the day was Rs. 80366728.

Source : Equity Bulls

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