24 October 2020
2QFY21 Results Update | Sector: Technology
Mphasis
Estimate change
TP change
Rating change
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Financials & Valuations (INR b)
Y/E Mar
2020 2021E
Sales
88.4
98.8
EBIT
14.2
16.0
PAT
11.8
12.5
EPS (INR)
61.5
66.2
EPS Gr. (%)
9.6
7.6
BV/Sh. (INR)
312.6
312.2
Ratios
RoE (%)
21.4
21.4
RoCE (%)
18.3
17.6
Payout (%)
56.9
45.3
Valuations
P/E (x)
22.4
20.8
P/BV (x)
4.4
4.4
EV/EBITDA (x)
14.8
13.3
Div Yield (%)
2.5
2.2
MPHL IN
193
257.9 / 3.4
1463 / 612
-8/71/45
379
CMP: INR1,382
TP: INR1,665 (+21%)
Upgrade to Buy
Continued strength in Direct business to drive rerating
Strong beat on revenues; Highest ever deal wins
2022E
112.5
18.7
14.7
78.0
17.9
356.6
24.1
20.2
51.3
17.7
3.9
10.7
2.9
Mphasis (MPHL) reported solid growth in 2Q, despite 13% QoQ decline in
the DXC business. This should assuage concerns on the potential growth
impact from continued weakness in the DXC business. Our analysis suggests
Mphasis’ exposure to DXC should reduce to 14% of revenues in FY22, half
the exposure for FY19. This should lower the multiple discount in MPHL
shares, v/s peers such as LTI (currently at 25%), despite comparable growth
in the Direct business. Hence, we upgrade Mphasis to Buy.
Moreover, all-time high net new deal win TCV (USD360m; +100% YoY) in 2Q
suggests momentum in the Direct business would continue for some time.
This, in addition to bottoming out of DXC in FY22, should help MPHL deliver
12% USD CC growth next year.
The EBIT margin expanded 140bp QoQ to 16.1% (moderately ahead of our
estimate of 15.8%) on the back of operational efficiencies. We expect MPHL
to end FY21 near the top-end of the EBIT margin guidance range of 15.5–
16.5% and likely exceed this in FY22.
We upgrade our FY21/FY22E EPS by ~7%, largely driven by (a) revenue beat
in the quarter, (b) recent large deal wins, and (c) an optimistic outlook.
Notwithstanding the DXC overhang, with strong digital transformation
capabilities and low exposure to impacted verticals, we believe Mphasis is
well-positioned to be a key beneficiary in the current context. Our TP implies
21x FY22E. Upgrade to Buy.
Mphasis reported revenue (USD) / EBIT / PAT growth of 7%/13%/9% YoY v/s
our estimates of 3%/6%/4% YoY. For 1H, the company reported revenue
(USD) / EBIT / PAT growth of 5%/13%/7% YoY.
Revenue growth of 6% QoQ CC beat our estimate of 2.2% QoQ CC.
Segment-wise, Direct revenue saw sharp recovery and grew 10.9% QoQ CC.
DXC’s (16% of revenue) sharp decline of 15.5% QoQ CC is more than
expected.
BPO (+35% QoQ) led growth as onsite headcount increased (96% QoQ) in
the service line. IMS reported decent growth of (2% QoQ), while ADM
declined (-1% QoQ). Excluding BPO, other service lines reported a headcount
reduction.
In terms of verticals, BCM (17% QoQ) and Others (6% QoQ) led growth.
Insurance reported decent growth (2.5% QoQ), while IT, Communication &
Entertainment (ITCE) (-11% QoQ) and Logistics (-6% QoQ) remained
challenged.
Among the geographies, the Americas (9% QoQ) and India (18% QoQ) were
the growth drivers, while EMEA (-3% QoQ) and RoW (-2% QoQ) declined
sequentially.
The gross margin expanded 150bp QoQ, marginally ahead of our estimate.
Benefits from improved gross margins were partially offset by higher-than-
expected SGA.
Revenues beat estimates
Shareholding pattern (%)
As On
Promoter
DII
FII
Others
Sep-20
56.2
16.2
22.1
5.5
Jun-20 Sep-19
56.2
52.2
14.2
13.7
23.7
28.8
6.0
5.3
FII Includes depository receipts
Mukul Garg – Research analyst
(Mukul.Garg@MotilalOswal.com)
Heenal Gada– Research analyst
(Heenal.Gada@MotilalOswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.