OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Global Economy
On the surface, the global economy appears poised for a gradual
recovery from the powerful blows of the pandemic and war on Ukraine. China is rebounding
strongly following the reopening of its economy. Supply-chain disruptions are unwinding,
while the dislocations to energy and food markets caused by the war are receding.
Simultaneously, the massive and synchronous tightening of monetary policy by most central
banks should start to bear fruit, with inflation moving back toward its targets. IMF
estimates that global growth will bottom out at 2.8 percent this year before rising
modestly to 3.0 percent in 2024. Global inflation will decrease, although more slowly than
initially anticipated, from 8.7 percent in 2022 to 7.0 percent this year and 4.9 percent
in 2024. Notably, emerging market and developing economies are powering ahead, with growth
rates (fourth quarter over fourth quarter) jumping from 2.8 percent in 2022 to 4.5 percent
in 2023. The slowdown is concentrated in advanced economies, especially the euro area and
the United Kingdom. Below the surface, however, turbulence is building, and the situation
is quite fragile, as the recent bout of banking instability shows. Inflation is much
stickier than anticipated even a few months ago. While global inflation has declined, that
reflects mostly the sharp reversal in energy and food prices. But core inflation,
excluding the volatile energy and food components, has not yet peaked in many countries.
It is expected to decline to 5.1 percent this year (fourth quarter 2022 over fourth
quarter 2021), a sizable upward revision of 0.6 percentage point from IMFs earlier
January 2023 update, well above target.
At the start of 2023, there was widespread optimism that global
economic growth might not slow down as much as had been feared. Positive developments
included Chinas reopening, signs of resilience in Europe and falling energy prices.
But a crisis in the banking sector that emerged in February-March 2023 has forced a
rethink. The health of the banking sector especially that of the mid-sized banks with
their surplus invested in long-dated US treasury bonds will need close monitoring. The
International Monetary Fund downgraded its forecasts for the global economy in April 2023,
noting the recent increase in financial market volatility. The IMF now expects economic
growth to slow from 3.4% in 2022 to 2.8% in 2023. The global economy which has been
grappling with the consequences of high and persistent inflation, the rapid rise in
interest rates, elevated debt levels and Russias war in Ukraine, now also has added
risks due to the banking crisis. Against this backdrop, the IMF acknowledged that
forecasting was difficult in this climate as the "fog around the world economic
outlook has thickened."
As businesses face elevated inflation, streamlining costs and
redesigning supply chains are likely to come to/stay at the fore; all of this requires
technology to implement. Technology Themes such as cleantech/green energy, sustainable
management, Environmental, Social, and Governance (ESG) have acquired heightened
importance and attention.
IT Industry Outlook
Per Gartner, Global Enterprise software and IT services breached the $2
Tn mark, grew at 4.5% y-o-y in CY2022, in a show of resilience in a year marked by
significant pricing pressures and a shift towards shorter and lower value deals. This was
nearly half of the estimated 9% at the start of the year when it was expected that the
CY2021 wide runway would continue. While FY2022 was a year of milestones and resurgence-an
outlier for the Indian technology industry, FY2023 has been the year of continued revenue
growth with a focus on strengthening industry fundamentals and building on trust and
competencies. The volatile global economic scenario and impending recession continues to
support the demand for technology adoption and digital acceleration though the momentum
has slowed down towards the end of FY23. Despite slowing momentum that portends slower
growth in 2023 of India IT, technology has become a strategic imperative that is a
critical component of business innovation and transformation, as well as a source of
improving operational and cost efficiencies.
In FY2023, Indias technology industry revenue including hardware
is estimated to cross $245 Bn (8.4% y-o-y growth), an addition of $19 Bn over last year.
Exports, at $194 Bn, are expected to grow at 9.4% in reported currency terms, and 11.4% in
constant currency terms. Domestic technology sector is expected to reach $51 Bn, growing
at 4.9% y-o-y. In rupee terms, domestic tech revenues is expecting a 13% y-o-y growth on
the back of continued investments by enterprise and the government. The industry continues
to be a net hirer, adding 290K employees, taking the total employee base to ~5.4 Mn (5.7%
y-o-y growth), strengthening its position as the ‘Digital Talent Nation for the
world. Workplaces are witnessing a shift towards hybrid working and satellite offices,
following decentralized delivery models and rise of satellite offices across Tier II and
Tier III cities.
The share of Digital revenue in India IT revenue is at 32-34% and this
pie is growing at 16% p.a. The Top digital areas for India include Cloud Computing,
Customer Experience, AI, Cybersecurity, RPA and automation and analytics.
Mphasis Overview
Mphasis is an Information Technology solutions provider that applies
next-generation technology to help enterprises transform businesses globally. The company
was formed in June 2000 after the merger of Mphasis Corporation and BFL Software Limited.
In June 2006, EDS purchased a controlling stake in this company. In August 2008,
Hewlett-Packard (HP) acquired EDS. On 4 April 2016, HP entered into a definitive agreement
with private equity funds managed by Blackstone to sell the shares held by it in the
Company.
In September 2016, Blackstone Group through its fund "Marble II
PTE" completed the share purchase and the Company has become a Blackstone group
Company since then. Blackstone is one of the worlds leading investment and advisory
firms with over US$880 billion in assets under management. In April 2021, Blackstone
committed up to $2.8 billion to acquire controlling stake in Mphasis, along with Abu Dhabi
Investment Authority (ADIA) and UC Investments (Office of the Chief Investment Officer of
The Regents, University of California) and other long-term investors.
Mphasis blends deep domain expertise with cutting-edge technology,
which has helped cement its position with marquee clients and build momentum for the
future. Its Front2Back™ and Zero Cost Transformation are proven transformation
frameworks that allow it to play across the tech value chain.
Mphasis unique tribes-led, competency-based go-to-market (GTM)
and solutioning model positions it strongly in digital areas -the tribes are GTM
specialists organized around high-demand tech themes that are instrumental in driving
clients next-generation tech agendas. Tribes are institutional and repeatable in
their design. Mphasis continually creates new tribes or redesigns existing ones based on
what it sees as high-potential secular opportunities. Furthermore, Mphasis supports the
tribes model with a smart surround- and reinforce strategy that characterizes
Mphasis innovation DNA- including client Chief Technology Officer (CTOs) embedded in
key and promising accounts, the consulting-oriented Technology Advisory Group (TAG),
programmatic innovation (harnessing the start-up ecosystem), focused research and
Intellectual Property (IP), (innovation from the labs to the real world), and technology
vision provided by the Mphasis Technology Council (MTC).
Mphasis is organized around accounts, not by traditional
vertical/horizontals. There is not the traditional matrix structure of vertical/
horizontals/geos that can weigh down decision-making. This means that Mphasis GTM is
aligned along the customer as the basic unit and resource allocation is done at a granular
level of the customer. This creates improved agility and responsiveness. The clientcentric
agile org design enables Mphasis to successfully focus on account depth reflected in an
improving average revenue per client. The depth over breadth positioning also means
Mphasis makes more considered choices regarding its new clients by shortlisting and
targeting those clients that can scale. This strategy is bearing fruit as can be seen in
the resilience and scale-up of Top-5 and 10 clients over a sustained time period. Despite
the various headwinds faced by the industry in the latter part of the year, Mphasis
recorded revenues upwards of $ 200 Million through its top client for the first time. The
growth engine has got diversified through FY23 with clients outside the Top-10 also on a
strong double-digit growth trajectory, and the addition of 13 new clients. Mphasis has
three clients which contributed >US$150 million in annual revenue (FY23).
Our FY23 was impacted due to sharp decline in mortgage BPO revenue
which suffered due to tough conditions in the US mortgage market with unremitting interest
rate hikes
Revenues
We continued the growth momentum witnessed in FY22 into
FY23 also and have registered strong growth despite the macro-economic challenges
faced in the mortgages sector and the sentiment in the last quarter of the year.
Reported Net revenue in FY23 was Rs 137,985 million representing a
growth of 15.4% over FY22. During the year rupee depreciated 8.2% against USD. Adjusting
for the rupee depreciation, net revenue grew 8.4% in FY23.
Overall gross revenue grew 16.7% in FY23 to Rs 138,430 million. On a
constant currency basis, overall gross revenue grew 9.7% in FY23.
Direct revenue grew 19.3% on a reported basis and 12.0% in constant
currency basis in FY23 to Rs 129,921 million. The mortgage business has slowed down
significantly in the year. However, excluding the same, the organic growth has been broad
based across all key portfolios of Direct business.
We continued to successfully execute on our strategy to de-risk DXC
business, the revenues from which declined 19% on a reported basis in FY23. Revenue
declined 23.5% on a constant currency basis in FY23. Revenue from DXC was Rs 6,204 million
in FY23 and constituted only 4.5% of the gross revenue.
Rs million
|
Year ended 31 Mar 2023 |
% |
Year ended 31 Mar 2022 |
% |
| Direct |
129,921 |
94% |
108,882 |
92% |
| DXC |
6,204 |
4% |
7,659 |
6% |
| Others |
2,305 |
2% |
2,070 |
2% |
| Total |
138,430 |
|
118,611 |
|
Segment Revenues
A segment analysis of revenues for the year ended March 2023 is given
below:
| Segment |
Year ended 31 Mar 2023 |
% |
Year ended 31 Mar 2022 |
% |
| Banking and Financial Services |
74,190 |
54% |
63,755 |
54% |
| Insurance |
11,449 |
8% |
10,771 |
9% |
| Technology Media and Telecom |
17,980 |
13% |
15,743 |
13% |
| Logistics & Transportation |
18,076 |
13% |
15,552 |
13% |
| Others |
16,735 |
12% |
12,789 |
11% |
| Total Revenues |
138,430 |
|
118,611 |
|
Focus vertical of Banking and Financial Services grew 16.4% on a
reported basis over FY22, slower than last year due to weaknesses in the mortgage segment.
Banking and Financial Services and Insurance segments comprise 62% of our overall revenue.
Revenues by Geography
Rs million
| Regions |
Year ended 31 Mar 2023 |
% |
Year ended 31 Mar 2022 |
% |
| AMERICAS |
113,200 |
82% |
93,917 |
79% |
| EMEA |
13,968 |
10% |
13,643 |
12% |
| INDIA |
7,086 |
5% |
5,932 |
5% |
| ROW |
4,177 |
3% |
5,120 |
4% |
| Total Revenues |
138,430 |
|
118,611 |
|
Americas continue to be our prime market and revenues grew 20.5% in
FY23 on a reported basis.
Revenues by Service Type
| Service Type |
Year ended 31 Mar 2023 |
% |
Year ended 31 Mar 2022 |
% |
| Application Services |
94,705 |
69% |
74,580 |
63% |
| Business Process Services |
26,660 |
19% |
29,826 |
25% |
| Infrastructure Services |
17,066 |
12% |
14,206 |
12% |
| Total Revenues |
138,430 |
|
118,611 |
|
Application Services include assisting customers with design and
development of customized software applications and maintenance, enhancement and testing
of customers developed and third-party software. Revenues grew at a robust 27% in FY23.
Business Process Services include customer service, transaction
processing, and compliance knowledge processing including certain projects involving
complete transformation and integration of processes using automation tools. This service
registered an annual degrowth of 10.6% due to pressures faced by the US mortgage industry
in FY23.
Infrastructure Services include end-to-end managed mobility solutions
covering workplace management and other services, hosting services, data center services,
payment managed solutions and help desk.
Revenues by Delivery Location
Rs million
| Delivery Location |
Year ended 31 Mar 2023 |
% |
Year ended 31 Mar 2022 |
% |
| Onsite |
77,439 |
56% |
69,406 |
59% |
| Offshore |
60,991 |
44% |
49,205 |
41% |
| Total Revenues |
138,430 |
|
118,611 |
|
Revenues by Project Type
| Project Type |
Year ended 31 Mar 2023 |
% |
Year ended 31 Mar 2022 |
% |
| Time and Material |
77,996 |
56% |
66,763 |
56% |
| Transaction Based* |
18,464 |
13% |
18,924 |
16% |
| Fixed Price |
41,970 |
31% |
32,924 |
28% |
| Total Revenues |
138,430 |
|
118,611 |
|
Transaction based revenue comprises of projects where the commercials
are based on unit of Output
We continue to focus on increasing the revenue from Fixed Price and
Transaction Based contracts as it is an important margin lever for us. In FY23, the
revenue from Fixed Price contracts and Transaction Based contracts increased 16.6% to Rs
60,434 million and constituted 44% of overall revenue in FY23.
Results of Operations
Rs million
|
Year ended 31 Mar 2023 |
Year ended 31 Mar 2022 |
YoY Growth % |
| Gross Revenues |
138,430 |
118,611 |
16.7% |
| Profit / (loss) on cash flow hedges reclassified to revenue |
(445) |
1,003 |
|
| Net Revenues |
137,985 |
119,614 |
15.4% |
| Cost of revenues |
100,475 |
86,829 |
15.7% |
| Gross profit |
37,510 |
32,785 |
14.4% |
| GM% |
27.2% |
27.4% |
-0.2% |
| Selling expenses |
8,635 |
7,196 |
20.0% |
| SE % |
6.3% |
6.0% |
0.3% |
| General and administrative expenses |
7,788 |
7,320 |
6.4% |
| GA % |
5.6% |
6.1% |
-0.5% |
| Operating profit |
21,087 |
18,269 |
15.4% |
| Operating Margin |
15.3% |
15.3% |
- |
| Foreign exchange gain, net |
452 |
486 |
-6.9% |
| Other income, net |
1,165 |
1,119 |
4.1% |
| Interest expenses |
(973) |
(744) |
30.7% |
| Profit before taxation |
21,731 |
19,129 |
13.6% |
| Income taxes |
5,351 |
4,820 |
11.0% |
| - Current |
5,079 |
4,860 |
|
| - Deferred |
272 |
(40) |
|
| Net profit |
16,379 |
14,309 |
14.5% |
| Earning per share (par value Rs 10) |
87.1 |
76.4 |
14.0% |
Note: The figures of the previous periods have been regrouped /
reclassified wherever necessary to conform to the current periods classification.
*The above classification of expenses is based on management reporting
Cost of Revenues
Cost of revenues primarily comprise of direct costs and includes direct
manpower, travel, facility expenses, network and technology costs.
Consolidated cost of revenues for FY23 was at Rs 100,475 million. Cost
of revenues was 72.8% of revenues as compared to 72.6% during the previous financial year.
Selling Expenses
Selling expenses for the year ended March 2023 was Rs 8,635 million
representing 6.3% of revenues against 6.0% of revenues in the previous year.
General and administrative Expenses
General and administrative expenses for the year ended March 2023 was
Rs 7,788 million representing 5.6% of revenues against 6.1% of revenues in the previous
year.
Operating Profit
Operating profit for the year ended March 2023 was Rs 21,087million and
grew 15.4% in FY23.
Income Taxes
Income taxes were Rs 5,351 million for FY23 as compared to Rs 4,820
million for FY22. The effective tax rate decreased from 25.2% in FY22 to 24.6% in FY23.
Net Profit
Net profit for FY23 grew 14.5% over FY22 to Rs 16,379 million. Net
margin for FY23 was 11.9% as against 12.0% for FY22.
Earnings per share
Earnings per share grew from Rs 76.4 for the year ended March 2022 to
Rs 87.1 for the year ended March 2023, which represents a growth of 14.0%.
Ratios
| Ratios |
Year ended 31 Mar 2023 |
Year ended 31 Mar 2022 |
| Debtors Turnover |
5.5 |
5.8 |
| Current Ratio |
2.1 |
2.0 |
| Interest Coverage Ratio* |
21.7 |
24.6 |
| Debt Equity Ratio |
0.0 |
0.1 |
| Operating Profit Margin |
15.3% |
15.3% |
| Net Profit Margin |
11.9% |
12.0% |
| Return on Equity |
22.0% |
21.2% |
| Inventory Turnover |
NA |
NA |
* Includes interest charges on lease
The Company has delivered returns of 22% this year and continues to
generate strong operating cash flow. The Company continues to pay consistent dividends to
its shareholders and maintain strong cash position as well.
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