Info-tech

Mphasis sees more traction from Blackstone portfolio

Our Bureau Bengaluru | Updated on November 27, 2020 Published on November 25, 2020

Company plans to reduce revenue dependence on DXC Technologies

 

Mid-tier IT services company Mphasis’ engagement with the portfolio companies of PE fund Blackstone has witnessed a steady increase, with revenues from this portfolio growing at more than double the company average.

Analysts tracking the company said the revenue contribution from Blackstone portfolio companies is at mid-single digits of overall revenue currently. Last week, there were reports about Blackstone’s plans to exit Mphasis, which were later denied by the IT services major. Blackstone owns 56.16 per cent stake in Mphasis, after raisig its stake by 8 per cent in March this year.

The Covid-19 breakout has actually levelled the playing field for Mphasis. Prior to the breakout of the Covid-19 pandemic, Mphasis had significantly underperformed its IT mid-cap peers due to concerns about its DXC Technologies revenue stream plateauing out.

DXC channel

The US-based DXC Technologies’ channel revenue represents around 16 per cent of the total for Mphasis, and has grown steadily since then. The DXC channel has 33 clients in the $1-million annual revenue bucket, which represents huge potential for Mphasis to scale up in this channel. However, Mphasis does not expect DXC business to be a major contributor for its revenues going forward, analysts tracking the company said.

During an earnings call recently, Mphasis CEO Nitin Rakesh said the company is consciously managing and de-risking its exposure to DXC. This account is likely to see softness. “But the backstop due to the MRC (minimum revenue commitment for five years with HP Enterprises) till September 2021 gives us enough room to manage this exposure. Going forward, as the centre of gravity continues to tilt towards the faster-growing DI (direct international business) piece, the impact on overall growth from DXC’s exposure will only continue to lessen.”

The Mphasis management also said the clients included in the DXC/HP business with whom Mphasis has a direct contract, have been moved to the direct core business.

As such, DXC will now be reported on a standalone basis compared to the DXC/HP classification earlier. All clients that are coming through the DXC channel are now clubbed under the DXC standalone reporting.

After Blackstone acquired 60 per cent stake in Mphasis from HP Enterprises in FY17, HP and Blackstone entered into a five-year master services agreement (MSA), with three additional automatic renewals of two years each.

Under this MSA, HPE committed a minimum revenue amount of $990 million over the next five years. Also, Mphasis is included in HP’s preferred provider programme, opening up significant avenues for growth. Mphasis’ MSA is due for renewal in September 2021.

Additionally, an MRC of $300 million is available for consumption till contract renewal, which protects revenue from the downside. In case of any revenue shortfall, DXC will indemnify the loss of contribution, protecting the margin.

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Published on November 25, 2020
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