Direct Core flourishing in Digital; Macro remains supportive
We attended Mphasis’ (MPHL) analyst day, where management shared the outlook on industry and highlighted its strategy that is turning around growth for the company. Key takeaways:
* MHPL has transformed itself into a provider of new-gen digital services – an evolution in sync with the shift in technology consumption by customers.
* According to ISG, the Digital segment in the Global IT Services market is expected to deliver a healthy CAGR of 16.4% over FY18-22. Everest expects BFSI (MPHL’s largest vertical) growth to accelerate with a CAGR of 3-4% over FY19-22, with the drivers being return of ERP wave, payment infra modernization, product innovation by insurers, and FinTech mindset.
* MPHL’s next-gen services have been driving Direct Core revenue growth. The key drivers are  new client wins in Blackstone portfolio and outside and  partnerships with next-gen technology players like AWS and Azure.
* Blackstone’s portfolio companies contributed 5% of Direct Core revenue in FY19 and will continue expanding its contribution to revenues.
* MHPL’s relationship with DXC has transformed over the years from that of being an IMS supplier in the Americas in FY16 to becoming a reliable service transformation and solution partner in FY19. It is now expanded from the Americas to Europe and APAC as well.
Valuation and view
MHPL has been among the few mid-tier IT companies over the last few quarters where:
 growth visibility has remained intact with continued revenue growth of low-to-mid teens and
 margin estimates have not been revised downward (in part thanks to the already low base).
It has amongst the best cash generation and RoE in excess of 20%. Our FY19-21 CC revenue CAGR is 12.5% and EPS CAGR is 13%. Our price target of INR1,120 discounts forward earnings by 15x, implying an upside of 17%. Maintain Buy. Any impact to business from DXC amidst the latter’s struggles in its current business portfolio could pose a risk to our thesis.
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