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Mphasis: Headwinds receding, risk-reward balanced

7 Mar 2024 , 12:24 PM

Analysts of IIFL Securities upgrade Mphasis (MPHL) to ADD (from REDUCE) with a 12-month TP of Rs2,600; implying 3% upside. After a sharp underperformance in the past two years leading to ~30% cut in FY24/25 EPS from its peak, the discount to mid-cap peers has expanded to ~20%. Analysts of IIFL Securities believe MPHL’s headwinds around DXC, DR and large clients are largely behind and its growth should converge towards peers through CY24 (2.6% Cqgr vs 3.4% for peers). MPHL has invested in expanding capabilities, verticals and geos to increase the TAM; which is visible in Direct channel (ex-DR) and non-top 10 client revenue growth, new client acquisition and deal wins. Analysts of IIFL Securities expect the ramp-up of won deals to result in a pickup in revenue Cqgr and forecast 11%/15% USD revenue/EPS Cagr over FY24-26. A sharp reversal in interest rate cycle in US and rebound in BFSI could pose upside risk to analysts of IIFL Securities estimates. The stock is currently trading at 23x FY26 P/E, leaving limited room for further de-rating given the potential pickup in growth. Hence, analysts of IIFL Securities upgrade to ADD.

Key drags on revenue largely behind:

Analysts of IIFL Securities expect MPHL’s Direct business (95% of revenues) to grow at 12% Cagr over FY24-26, driven by continued ramp-up of previously won deals, growth in non-top 10 clients and new client acquisition. Mortgage business (~6% of revenues) has bottomed out and could pick up once the interest rates start coming down in US. DXC now contributes only ~3% of the revenues. MPHL has won deals of ~USD1.2bn TCV in M9FY24 in the Direct channel (incl. 14 large deals), which gives visibility for near-term growth as revenue leakage subsides.

Operating leverage to drive margins higher:

Over the last three years, MPHL’s Ebit margins have been in a tight range of 15-16%. Some of the mid-cap peers have managed to increase margins, driven by operating leverage and productivity improvements. Analysts of IIFL Securities expect MPHL’s margins to inch up to 16% over the medium term, as growth rebounds, operating leverage kicks in and impact of merger-related costs subside.

Risk-reward balanced; upgrade to ADD:

MPHL trades at 23x FY26 P/E, at a ~20% discount to mid-cap peers. Analysts of IIFL Securities believe as MPHL’s revenue growth differential vs mid-cap peers reduces, the discount would narrow. They raise FY25/FY26 EPS by up to 3% and 12-mth TP to ₹2,600, now pegged at 24x (was 20x). Key risks: FX, BFS tech spending.

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