Q2FY24 Review: Mphasis: Pockets of weakness amid signs of stabilization

23 Oct 2023 , 11:28 AM

Mphasis (MPHL) reported Q2 net revenue of USD396mn, flat cc QoQ, below IIFLe of +1%, due to slower-than-expected revenue conversion and continued weakness in the BFS and Logistics verticals. Ebit margins stood at 15.5% (+10bps QoQ), as revenue decline was offset by productivity improvement. MPHL continues to expect margins (ex-M&A charges) to remain range-bound in FY24. After a record Q1, deal win TCV was soft at USD255mn. Mgmt is confident of delivering sequential growth for the rest of FY24; although Q3 could be impacted by higher-than-usual furloughs. Analysts of IIFL Securities lower their FY24-26 EPS estimates by up to 5%, as they incorporate Silverline acquisition and the weaker-than-expected revenue growth in Q2. Analysts of IIFL Securities are building in organic growth acceleration from Q4, due to stability in the Mortgage business, DXC and strong deal wins. Analysts of IIFL Securities 12-month TP reduces to Rs2,050 (was Rs2,150), based on 19X (unchanged) 2YF P/E. The stock is trading at 23x FY25 P/E, at a ~15% discount to mid-cap peers, which analysts of IIFL Securities believe is justified given the growth differential. They maintain REDUCE and believe consistent delivery in required for the stock to re-rate. 

BFS and Logistics continue to hurt growth: 

Direct channel revenues were broadly flat cc QoQ (-8.9% cc YoY), as BFS and Logistics continued to be impacted by macro uncertainty. Other verticals delivered healthy growth. DXC channel declined -6.1% cc QoQ. MPHL highlighted that the Mortgage business has bottomed out, but furloughs and continued pressure on discretionary could impact BFS growth in Q3. Deal wins were soft at USD255mn (-16% QoQ) and pipeline expanded 33% YoY. 

Margins flat; FY24 guidance reiterated: 

In Q2, Ebit margin stood at 15.5% (+10bps QoQ), 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 (ex-M&A charges of 70-80bps). Headcount was down 8% YoY. 

Maintain REDUCE: 

Analysts of IIFL Securities forecast MPHL to deliver 4%/5% USD revenue/EPS Cagr over FY23-25 and lagging mid-cap peers. The stock is trading at 23x FY25 P/E, at a ~15% discount to mid-cap peers; which analysts of IIFL Securities believe is justified given the growth differential. They 12 –month TP is Rs2,050, based on 19x 2YF EPS. Risk: client concentration.