Stock Fundamentals

Mphasis: Riding the digital wave

K.Venkatasubramanian K Venkatasubramanian | Updated on February 18, 2018 Published on February 18, 2018

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The company’s deal pipeline with key digital components puts it on a high growth path

The IT services landscape has been quite challenging with large software players registering single-digit revenue growth for several quarters now.

Only a few mid-tier IT players have managed to ride the digital transformation bandwagon and deliver well on their financials. After a change in ownership and stabilisation in its revenue channels, Mphasis appears well set on the path of achieving industry-leading growth rates.

HP, which owned over 60 per cent of Mphasis, sold the stake to private equity player Blackstone India in 2016. HP’s business itself was restructured, with Computer Sciences Corporation and HP Enterprise (EDS earlier) being merged — the entity is called DXC Technology.

Mphasis used to derive a major portion (70 per cent) of its revenue from the HP channel (now DXC/HP channel), which has dwindled steadily over the past four to five years to about a fourth currently. But the segment has started to grow again.

The other revenue stream is its direct international channel, which has become the main contributor to revenue (70 per cent).

Investors with a two-year horizon can consider buying the shares of Mphasis, given the company’s robust deal pipeline with significant digital components, improvement in key operating metrics and the prospect of newer revenue streams from Blackstone’s portfolio of companies.

The stock has risen by more than 35 per cent in the last one month. Despite the run-up, at ₹863, the stock trades at a reasonable 16 times its likely FY20 earnings, which is at a discount to the likes of Mindtree and L&T Infotech that trade at forward multiples of 17-20 times.

 

 

 

In the recent December quarter, the company’s revenue grew at 12.6 per cent year-on-year (in dollar constant currency terms), which was among the highest in the industry.

Revenue was ₹1,660 crore for the period. Profit came in at ₹289.1 crore, up 7.3 per cent over the same period last year. The growth in profits would have been in double-digits, but for higher forex gains last year.

Multiple channels deliver

Revenue visibility is robust for Mphasis, with the company managing to sign up deals worth $435 million so far this financial year, a 58 per cent increase over the same period the previous fiscal.

What has also been welcome for the company is that the share of digital revenues in the direct core channel is over 41 per cent.

The company has been able to offer next generation services such as digital transformation and GRC (governance, risk and compliance) to clients. This proportion of digital revenues is comparable with the best in the industry.

The HP channel too has bounced back after years of decline. After HP divested its stake, it gave a revenue commitment of $990 million over five years. This agreement has meant that the channel has stabilised and grown. In fact, revenues from the DXC/HP channel increased by over 15 per cent Y-o-Y for a couple of quarters now.

Apart from these two channels (DXC/HP and direct), the company is also all set to gain from 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 annually. Mphasis already has several wins in the segment. 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 three and in the $5-million bucket by eight over the past 12 months.

Mphasis has witnessed a steady increase in the proportion of projects delivered from onsite locations — from 51 per cent a year ago to 56 per cent currently. This shift in mix away from offshore indicates that there is continuous traction with clients and that newer projects are coming on-stream.

The onsite billing rates have gone up steadily across both applications and ITO (IT Operations) service lines. Rates have increased by 7.6 per cent and 21.1 per cent, respectively, over the past year.

The company has been able to increase the proportion of fixed-price contracts, which ensure better margins than time and material projects. Fixed price contracts now account for a fourth of overall revenue, compared with just over 20 per cent earlier.

The EBITDA (operating) margin has thus increased steadily over the last four quarters and is currently at 16.5 per cent, despite increasing manpower costs due to higher onsite deployment.

Published on February 18, 2018
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