Mphasis: Digitally sound

After a rather tepid 2017, many large and mid-tier IT players have witnessed robust traction in terms of contract wins and expanding revenues on the back of higher client spends towards transitioning legacy applications to the digital or cloud mode.

So much so, most quality names are now expected to grow in double-digits in dollar terms during FY19 and beyond. Given the rupee’s weakness and the likely volatility in the market in the light of the general election, select players in the IT pack can be picked as defensives by investors.

Mid-tier IT player Mphasis continues to gain momentum in revenues in both the direct and DXC/HP channels.

From our recommendation price last year, the stock — which rallied over 40 per cent before correcting — is up over 20 per cent in an otherwise falling market.

At the current market price of ₹1,012, the Mphasis stock would still be a good bet for investors with a two-year horizon. It trades at an estimated FY20 price-earnings multiple of 15 times, which is lower than the 17-19 times that peers such as Mindtree and L&T Infotech enjoy.

A robust deal pipeline with significant new-generation services/digital components, improvement in key operating metrics and the prospect of newer revenue streams from Blackstone’s portfolio of companies are positives for the company.

In the nine months of FY19, Mphasis’ revenue grew nearly 19 per cent to ₹5,706 crore over the same period in 2017-18, while net profits increased 34.6 per cent to ₹807 crore.

Key channels deliver

Revenue visibility is robust for Mphasis, with the company managing to sign up deals worth $484 million so far this financial year, a 11.1 per cent increase over the same period the previous fiscal. Also, more than 78 per cent of the new total contract value mentioned earlier involves delivering digital or new generation services.

In the direct channel (69 per cent of revenue), the growth has been healthy at 15 per cent for the nine months ended 2018-19. Around 40 per cent of the revenue in this segment comes from new generation/digital offerings.

Thus, the company has been able to offer next generation services such as digital transformation and GRC (governance, risk and compliance) to clients.

The HP channel too has bounced back over the last year after an extended period of decline. After HP divested its stake, it gave a revenue commitment of $990 million over five years.

This agreement meant that revenue from the channel has stabilised. In fact, revenue from the DXC/HP channel rose 24 per cent for the nine months of this fiscal (FY19) compared with the previous year and now accounts for 29 per cent of revenue.

Apart from these two channels, the company is also all set to gain from the entry into Blackstone’s portfolio of companies for delivering IT services.

There are about 80 companies in the Blackstone portfolio with a total addressable IT budget of $1.6-1.8 billion. Mphasis already has 10 wins in the segment.

This channel is expected to account for 5 per cent of revenue in FY19.

Thus, the company has multiple revenue streams to tap into.

Improving metrics

Client addition has been healthy, with the company increasing the tally of customers in the $10-million category by two to 19 and in the $1-million bucket by seven to 89. There has been a steady increase in the proportion of projects delivered from onsite locations — from 51 per cent a couple of years ago to 57 per cent now. This shift in mix away from onshore indicates that new projects are coming on-stream.

The offshore billing rates have gone up steadily across both applications and ITO (IT Operations) service lines. Rates have increased by 4.5 per cent and 20 per cent respectively in the last one year.

Utilisation rates have risen steadily over the past four to five quarters. Across service lines, they are at 84-90 per cent — among the best in the industry. By managing its operating levers, Mphasis has been able to keep its EBITA margin healthy at 16-17 over the last four quarters and is currently at 16.8 per cent.

A prolonged government deadlock in the US and a no-deal Brexit can cause uncertainties in clients’ decision-making.

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