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  • CMP : 2,893.8 Chg : 5.90 (0.20%)
  • Target : 2,730.0 (19.84%)
  • Target Period : 12 Month
Company Update

24 Jul 2022

Order book continue to be healthy

About The Stock

Mpahsis Ltd (Mphasis) offers application services, BPO and infrastructure services, BFSI, Technology, communication & logistic services.

  • The company’s direct revenue increased 35.7% YoY on a reported basis & 34.4% in CC terms in FY22
  • OCF, EBITDA of 75% and double digit return ratio (with RoCE of 20%)
Q1FY23 Results

Mphasis reported Q1FY23 results.

  • Direct revenue grew 2.1% QoQ on reported basis in Dollar terms, while it was up 2.4% QoQ in CC terms
  • EBIT margins came in at 15.3%, +10 bps QoQ
  • TCV of US$302 mn in Direct, consecutive 3rdth quarter of US$300mn+ deal wins
What should Investors do?

Mphasis’ share price has grown by ~3.7x over the past five years (from ~₹ 577 in July 2017 to ~₹ 2278 levels in July 2022).

  • We maintain BUY rating on the stock
Target Price and Valuation

We value Mphasis at ₹ 2730 i.e. 24x P/E on FY24E EPS

Key Triggers for future price performance
  • Strategy to mine top 10, 20 clients, adding high potential new logos, rise in deal sizes & expansion in Europe bodes well for long term growth
  • Further, the management stability, improving deal size, market share gains via vendor consolidation, low legacy exposure to drive 22.5% CAGR growth in direct revenues in FY22-24E
  • Improving revenue trajectory, higher offshoring, pricing and automation to boost EBIT margins (+60 b   ps to 16.0% in FY22-24E)
Alternate Stock Idea

Apart from Mphasis, in our IT coverage we like LTI.

  • Industry leading growth and healthy margins prompt us to be positive on the stock
  • HOLD with a target price of ₹ 4,480

Particulars

Particulars (₹ crore) Amount
Market Capitalization 55,058.0
Total Debt 527.2
Cash and Investment 2,384.6
EV 41,234.5
52 week H/L (₹) 3,197.0/2,044.6
Equity Capital 190.1
Face Value (₹) 10.0

Price Chart

Recent Events & Key Highlights

  • Continued strong momentum of deal wins
  • Key Risk: (i) Macroeconomic concerns in Europe, (ii) Lower than expected margins

Research Analyst

Sameer Pardikar
sameer.pardikar@icicisecurities.com

Company Update
ICICI Securities – Retail Equity Research

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Net Sales 7,731.0 8,843.5 9,722.3 11,961.5 14.5 14,575.3 17,204.9 19.9
EBITDA 1,323.8 1,650.4 1,802.9 2,117.6 16.9 2,521.5 3,148.5 21.9
EBITDA Margins (%) 17.1 18.7 18.5 17.7 - 17.3 18.3 -
Net Profit 1,073.4 1,184.8 1,216.8 1,430.9 12.6 1,719.3 2,153.4 22.7
Diluted EPS (|) 55.5 63.1 64.4 75.6 - 90.8 113.8 -
P/E (x) 41.0 35.8 34.9 29.8 - 24.8 19.8 -
RoE (%) 20.4 20.3 18.6 20.6 - 22.8 25.9 -
RoCE (%) 24.1 22.3 21.8 23.7 - 25.2 28.5 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

  • Revenue for the quarter was at US$435.9 million (mn), up 1.2% QoQ while in CC terms the growth was 2% QoQ. In rupee terms, revenues came in at | 3,391 crore up 4.5% QoQ
  • Revenue was driven by the US market (82% of the mix), which grew 5.6% QoQ, it was the 5th straight quarter of 5%+ QoQ growth. In terms of verticals, BFSI [banking and insurance together (62% of the mix)] contributed to growth as it grew 3.2% QoQ together
  • Direct revenue (93.5% of mix) grew 5% QoQ while DXC revenues (4.8% mix) declined by 4.4% QoQ. In CC terms Direct revenue grew by 2.4% QoQ while DXC declined by 6.7% QoQ
  • Company reported steady EBIT margins for the quarter were 15.3%, up ~10 bps QoQ & down by ~60 bps YoY. Adj. EBITDA margin after M&A expenses was 15.8%. The company maintained its EBIT margin guidance in the band of 15.5-17% for FY23
  • The company is confident on margin improvement in the subsequent quarters and levers for the same are as follows: a) Pricing: the company indicated that pricing remains a key lever as new contracts are coming at a better price b) continued focus on offshore improvement c) improving utilization & d) pyramid correction by fresher hiring. The company also indicated that the ESOP related expenses will reduce in the upcoming quarters
  • The TCV (new bookings) for the quarter was at US$302 mn, down by 13% QoQ. The company indicated that out of this US$60 mn deals were with Top 5 clients & one was a large deal with a TCV of US$50 mn. This is the 3rd quarter of US$300mn+ TCV
  • The company added 365 net employees in the quarter. The company indicated that it may look leaner quarter from employee hiring perspective. The company mentioned that hiring should be looked from the context of underlying structural change in the business from last 2-3 years where DXC revenue mix is going down and there is lot of employees being absorbed from this business to direct business. The company indicated that that hiring will be similar in Q2 vs Q1 and only like to pick up from Q3 onwards
  • The company indicated that attrition remained at elevated levels but it is seeing some green shoots there. It mentioned that lot of start-ups are facing fund crunch globally and there is influx of people from there, which is one of the levers for attrition to moderate in the subsequent quarters. it also indicated that with travel normalizing on shore attrition will moderate in 3-6 months.
  • The company indicated Blink acquisition revenues are running ahead of our expectation and it is looking at continued synergy benefits and it is seeing a good progress. It mentioned that Blink business is already integrated into their direct business. The company said that growth into top 11-20 accounts could be an indicator of the Blink progress
  • The company indicated that there is some pressure on the mortgage business which is visible in its BPO service line, on account of i) some deals are closed and renewals didn’t happen in time ii) volatility in US in terms interest rates and yields, which needs to be settle down, till that we may see some pressure in this business. It is also important to note that it has some DXC revenue component attached and slowdown in DXC business is also impacting insurance business.
  • The company indicated that it expects utilisation has a scope of improvement of 500bps in the medium term as freshers becomes billable.
 
Variance Analysis
 
 
   Q1FY23   Q1FY22   YoY (%)   Q4FY22   QoQ (%)  Comments
Revenue 3,411 2,691 26.8 3,278 4.1 Direct revenue grew by 5% QoQ, 2.4% QoQ in CC
Employee expense 2,394 1,926 24.3 2,301 4.0  
             
Gross Margin 1,017 765 33.0 976 4.2  
Gross margin (%) 29.8 28.4 139 bps 29.8 3 bps  
Other expense 417 275 51.5 399 4.5  
             
EBITDA 600 490 22.6 577 4.0  
EBITDA Margin (%) 17.6 18.2 -60 bps 17.6 -11 bps  
Depreciation & amortisation 80 62 27.6 80 -0.4  
EBIT 520 427 21.8 497 4.6  
EBIT Margin (%) 15.3 15.9 -62 bps 15.2 8 bps Margins were steady for the quarter
Other income (less interest) 13 31 -59.7 18 -32.1  
PBT 533 458 16.3 516 3.3  
Tax paid 131 118 10.6 124 6.0  
PAT 402 340 18.3 392 2.5  

Disclaimer

ANALYST CERTIFICATION

I/We, Sameer Pardikar, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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Pankaj Pandey

Head – Research

pankaj.pandey@icicisecurities.com

 

 

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

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