Strong deal wins a key positive for Mphasis

Consistent growth in its direct core business, continued momentum in deal-wins and a focus on capacity-building in areas such as IP-based platform and delivery transformation have kept Mphasis on a steady expansion path. In the December quarter, the mid-cap IT services company’s growth was broad-based across banking and capital markets as well as its direct core and digital risk business. While moderation in the DXC-HP channel business will need a watch, the management remains confident of benefiting from the strategy change in DXC and believes that Mphasis’ forte in the applications space can help harness significant opportunities with DXC.

Mphasis’ strong growth in the direct business, driven by strong deal-wins, should in any case offset the slowdown (if any) in the DXC business and aid the overall growth.

The company is reasonably priced at a 12-month price-to-earnings multiple of 18.52 times, lower than that of its peers such as L&T Technology Services, and Mindtree.

Steady revenue growth

In the recent quarters, new client wins have led the growth in direct business. Mphasis bagged $189 million worth of deals in the quarter ended December 2019 in the direct international business, its highest in the past five quarters. This provides good revenue visibility for the company in its direct channel business. The company’s banking and capital markets vertical has shown a decent revenue growth in the past few quarters. This vertical makes up for around 45 per cent of its total revenues. The emerging industries vertical, which makes up for nearly 28 per cent of total revenues, has been growing at a decent pace as well in the past five quarters.

The company has been mining Blackstone’s investee companies (HP sold its stake in Mphasis to Blackstone, a private equity firm in April, 2016). Revenue from this portfolio of clients grew 50 per cent y-o-y on constant currency basis December quarter. Two clients from the Blackstone portfolio have scaled up to Mphasis’ top 20 client list. Many of these clients, even after ceasing to be Blackstone investee companies, are continuing with Mphasis. This shows Mphasis’ ability to grow its revenues from multiple channels, client portfolio, segments and verticals.

Financials

In the quarter ended December 2019, Mphasis posted a net profit of ₹293.6 crore, up 7.4 per cent quarter-on-quarter. Revenues during the quarter rose 5.5 per cent sequentially to ₹2,276.7 crore. Operating margin during the quarter came in at 16.2 per cent, up 10 bps from the previous quarter, within its guided range of 15.5-17 per cent for 2019-20. The margins have been steady above 16 per cent levels for two consecutive quarters now, after falling to 15.5 per cent in the quarter ended June 2019. Mphasis’ Americas geography grew 3.5 per cent during the quarter, showing a slow revenue growth. This region makes up for nearly 80 per cent of the company’s revenues. But Europe grew 20 per cent, with closure of deals happening and uncertainty related to Brexit waning.

In terms of verticals, banking and capital markets continued to grow for the third consecutive quarter at a decent pace of 3.6 per cent (q-o-q). Emerging industries, which is made up of logistics & transportation, manufacturing, healthcare & pharma, grew 7.1 per cent sequentially in constant currency terms.

Risks

There are some risks related to its DXC-HP channel, which grew 1.9 per cent in the quarter ended December 2019. This channel makes up for 27 per cent of its revenues. This has weighed on the stock after the company announced its results. DXC, under new management, has announced a restructuring exercise, which could have an impact on Mphasis as well. DXC was earlier part of HP, which owned Mphasis. HP hived off DXC into a separate company. Other risks include clients curbing spending in the face of a global.

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