Robust deal wins, improving outlook…
Mphasis reported 4.6% QoQ fall in revenues in constant currency terms and margins declined 60 bps to 15.7%. However, the company has seen robust deal wins in the quarter with 66% YoY growth in new deal TCV to US$259 million. In addition, it has also signed US$216 million deal in July 2020 which will be reflected in Q2FY21E. Further, the company has also seen healthy client addition of 1 client in US$75 million and 3 in US$1 million bucket. In addition, the company has guided margins of 15.5%-16.5% for FY21E.
Revenues to witness improving trend led by healthy pipeline
Mphasis has major exposure to BFSI (~60% of revenues) and information, communication & entertainment (~15% of revenues), which are relatively less impacted by Covid 19 pandemic vs. travel & hospitality verticals. Further, lower legacy exposure and higher growth in digital technology puts the company in a sweet spot. This resulted in Mphasis seeing increase in new deal wins (up 66% YoY in Q1FY21, 38% YoY in Q2FY21E) of which 79% of TCV is in new generation technology. Further, it has also seen healthy traction in Blackstone portfolio and new client acquisition (up 40% YoY) in the current quarter. We believe the Blackstone portfolio (that is currently ~5% of overall revenues) has potential to at least double in next few years considering the company generates US$60 million in revenues vs overall opportunity of US$1.5 billion. This coupled with company’s commentary of healthy growth in coming quarters, de risking from DXC business and mining of existing client bodes well for company’s growth. We expect the company to register a CAGR of 8.3% over FY20-22E in rupee terms.
Margins to witness gradual improvement
The company is undertaking various measures for cost rationalisation like lower travel cost and lower discretionary spend. In addition, healthy revenue traction and improvement in utilisation will further drive company’s margins in coming quarters. Hence, we expect FY21E EBIT margins to increase 20 bps YoY to 16.2% and see a further improvement in FY22E leading to an improvement of ~40 bps YoY to 16.6%.
Valuation & Outlook
The company has lesser exposure to impacted verticals and continues to see improved traction in deal wins. In addition, the company is de risking its DXC portfolio by growing its direct international channel and driving its new client acquisition & Blackstone portfolio. Mphasis is also consistently winning large deals in greater than US$20 million category which bodes well for the company’s revenue growth trajectory. We also expect the company to witness improvement in margins in coming quarters led by cost rationalisation and improvement in revenues. Further, healthy balance sheet could help the company in inorganic revenue growth opportunities. However, recent run up in price prompt us to downgrade the stock from BUY to HOLD with a revised target price of | 1235 (16x FY22E EPS)
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