AnandRathi

Mphasis (Buy)

CMP: ₹848.1

Target: ₹1,000

After its takeover by Blackstone, Mphasis’ HP business (28 per cent of revenue, a 22 per cent CAGR over FY17-19) registered a classic turnaround, after having declined for four consecutive years.

Excellence in execution: With $285 million revenue for the third year with DXC/HP under the MSA (first-year revenue: $192 million: second year: $238 million), Mphasis has had much higher revenues versus the minimum yearly commitment ($198 million), which testifies to its execution capabilities. It registered 11 per cent constant currency growth in FY19 (6.8 per cent in FY18), in its direct business (72 per cent of revenue in Q2 FY20) driven by wallet-share gains in existing clients and sizeable increases in its quarterly deal wins ($90 million in Q4 FY17 to $174 million in Q2 FY20). However, given changes at DXC and flattening growth over the last three quarters from this channel, we build in lower growth ahead.

Attractive valuation: The stock now quotes at 14x FY21e PE (9x EV/EBITDA), which we consider attractive given the strong execution capability and dividend payout. Our target is based on 15 x FY21e PE (10 x EV/EBITDA) plus 4 per cent dividend yield/4 per cent FCF yield.

Key risks: Mphasis lags its peers in client addition in larger buckets ($5-20 million+ category) as more of the addition is in sub $5 million+ bracket. With DXC going through significant troubles, there is a fear of slowdown from DXC channel (volumes or pricing).

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