Published on 19/12/2020 9:55:26 AM | Source: ICICI Direct

Buy Mphasis Ltd For Target Rs.1,600 - ICICI Direct

Posted in Broking Firm Views - Long Term Report| #IT Sector #Mphasis Ltd #Broking Firm Views Report #Quarterly Result #ICICI Direct

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Healthy growth despite DXC challenges…

Mphasis reported a healthy set of Q2FY21 numbers. Revenues in dollar terms increased 7.2% QoQ mainly led by 11.7% QoQ growth in direct channel partially offset by 13.3% QoQ decline in DXC channel. While optically it looks like bulk of the growth was due to BPO, however, the growth was in IT also if one adjusts dip in DXC (that is predominantly in IT). In addition, the company has guided at margins of 15.5-16.5% for FY21E.


Well poised to capture upcoming growth

The company has seen healthy growth in banking and capital markets (up 15.2% QoQ) led by higher client mining & market share gain via vendor consolidation. The company’s direct channel has also witnessed healthy growth in Europe (up 23.0% QoQ) while the company expects Europe to continue to see traction in coming quarters. In addition, healthy deal wins of 87.0% YoY growth in net new deals to US$619 million and deal pipeline (up 75.0% YoY and 3x jump in cloud pipeline) gives a long term visibility of revenues. This, coupled with the company’s capability to mine clients effectively, ability to win & construct large transformation deals, market share gains via vendor consolidation, low legacy exposure, ability to proactively win end to end digital deals, traction in Blackstone portfolio (can double to US$60 million vs overall opportunity of US$1.5 billion) and exposure to relatively lesser impacted verticals due to pandemic gives us confidence of healthy growth in coming quarters. This will also enable the company to de-risk from the DXC business. Hence, we expect the company to register a CAGR of ~10% in dollar revenues over FY20-23E.


Margins to witness gradual improvement

Despite healthy revenue growth in revenue, growth in EBITDA margins was marginal (up 30 bps QoQ) mainly due to onsite centric ramp up in new deal wins, higher transition cost in large deals, lower utilisation and investment to capture more deals. However, in longer term we expect it to benefit from improving revenue trajectory, higher offshoring, utilisation. Hence, although in FY21E we expect EBIT margins to increase merely by 10 bps to 16.1%, we expect EBIT margins to improve 60 bps over FY21E-23E to 16.7%.


Valuation & Outlook

We believe the company is well poised to capture the improving growth in the technology space led by less exposure to impacted verticals, improved traction in deal wins, capability to mine clients effectively, market share gains via vendor consolidation, low legacy exposure and traction in Blackstone portfolio. In addition, we expect margins to witness a gradual improvement led by higher utilisation and offshoring. Further, healthy balance sheet could help the company in inorganic revenue growth opportunities. Hence, we upgrade the stock from HOLD to BUY with a revised target price of | 1600 (18x FY23E EPS).


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