Q1FY24 Review: Mphasis: Weak near term, potential recovery priced in

24 Jul 2023 , 02:11 PM

Mphasis (MPHL) reported Q1FY24 net revenue decline of 3.3% cc QoQ (-8.9% cc YoY), below IIFLe of -2%. Revenue decline was led by continued weakness in discretionary spend in the BFS vertical. Ebit margins stood at 15.4% (+10bps QoQ), as revenue decline was offset by productivity improvement. MPHL continues to expect margins to trend higher in FY24. Deal win TCV came in at a record USD707mn, (2x of TTM avg.), driven by 7 large deals. Management is confident of delivering sequential growth in Q2 and further acceleration in H2. Outlook for BFS segment still remains uncertain, although initial signs of green shoots are visible. Analysts of IIFL Capital Services lower their FY24-26 EPS estimates by 1-2% but are now building in a generous 3.8% Cgqr in the rest of FY24 owing to strong deal wins.

Hence, analysts of IIFL Capital Services increase theur target multiple also to 19x (was 17x), leading to their 12-mth TP of Rs2,040 (was Rs1,850). However, despite that, they cannot find upside with 36% rally in the stock price in past three months. With the stock trading at 22.6x FY25 P/E, they believe the growth recovery is priced in. They cut it to REDUCE given better growth adjusted valuations for other mid-cap peers. 

BFS continue to hurt growth: 

Direct channel revenues declined for the third straight quarter at -3.2% cc QoQ (-7.2% cc YoY), as BFS continued to be impacted by lower discretionary spend. Other verticals (ex-Logistics) saw growth recovery. DXC channel declined sharply at -10.5% cc QoQ. MPHL highlighted outlook for BFS still remains uncertain, while initial signs of green shoots are visible in the Mortgage segment. Deal wins came in at record USD707mn (+40% YoY TTM) and pipeline expanded 23% YoY.

Margins flat; FY24 guidance reiterated: 

Ebit margin stood at 15.4% (+10bps QoQ) in Q1, as revenue decline was offset by reduction in headcount and productivity improvements. MPHL reiterated guidance for Ebit margins to be in the band of 15.25%-16.25% for all four quarters of FY24 and trend higher on a YoY basis. Headcount was down 8% YoY.

Valuations unattractive: 

Analysts of IIFL Capital Services forecast MPHL to deliver 5%/9% USD revenue/EPS Cagr over FY23-25, lagging behind mid-cap peers. Post the recent rally, the stock is trading at 22.6x FY25 P/E, in line with much faster growing mid cap peers; which they believe prices in the recovery. Their 12–mth TP is Rs 2,040, based on 19x 2YF EPS. Risk: client concentration.