Mphasis: Investing to expand the TAM

28 Aug 2023 , 10:04 AM

Recommendation: Reduce; Target Price: Rs 2040

At its analyst meet, Mphasis (MPHL) highlighted how their investments in expanding capabilities, verticals and geographies have resulted in 3x expansion of their TAM over 2019-23. MPHL continues to focus on its capability-led differentiation through spotting early technology plays like Cloud, Cognitive and GenAI. While BFS remains its anchor vertical, MPHL has now achieved scale in other verticals too. Its new client acquisition (NCA) continues to fire, driven by its large deal origination framework and Blackstone portfolio companies. The company has started seeing initial green shoots of demand stabilisation, which is visible in the record-high deal TCV wins in Q1. Over the medium term, MPHL expects to deliver top-quartile revenue growth at stable margins. However, given a subdued FY24 (-2.5% cc YoY revenue growth), analysts of IIFL Capital Services forecast MPHL to deliver 11% EPS Cagr over FY23-26. Hence, analysts of IIFL Capital Services maintain REDUCE rating on the stock with a 12-mth TP of Rs2,040, given better growth-adjusted valuations for other mid-cap peers. 

Structural growth drivers for tech spend intact: 

MPHL highlighted that despite the ongoing macro challenges, structural themes of Cloud migration and digitisation remain the primary focus for clients, albeit with an increased appetite for cost take-out deals. The company has started seeing green shoots with record-high deal win TCV of USD707mn in Q1. BFS stays as the anchor vertical for MPHL, but other verticals like Insurance, TMT, Logistics & Transportation and Healthcare are being scaled as well. Its NCA engine continues to fire with multiple large deals in non-BFS vertical. 

AI-driven capability investments to drive differentiation: 

MPHL has launched a dedicated AI business unit, which is leading to a sharp increase in deal wins (1/3rd of deal wins in Q1 came from AI investments) and strong pipeline. Its Tribes and Archetypes strategy has contributed 80% of its deal win TCV, leading to a higher proportion of pro-active deals. MPHL has doubled down on looking out for strategic M&A to boost its capabilities. 

Margins to remain stable with an upward bias: 

Over the last four years, MPHL has delivered broadly stable margin while investing for growth. Management is confident of maintaining margins with an upward bias over the medium term, driven by levers like employee pyramid rationalisation, increasing offshoring and utilisation. Risks: Client concentration.