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Mphasis Ltd Management Discussions

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Jul 16, 2024|12:19:59 PM

Mphasis Ltd Share Price Management Discussions

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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