Published on 20/05/2020 11:43:59 AM | Source: Motilal Oswal Financial Securities Ltd

Neutral Mphasis Ltd For Target Rs.860 - Motilal Oswal

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Decent performance; Soft outlook!

Direct international drives growth, deal wins healthy

* Deal wins (USD 201mn) during the quarter were healthy, 12% above the 4 quarter rolling average. 4QFY20 revenue growth at 1.5% (QoQ, CC) was marginally behind our estimates, as weakness in DXC channel overshadowed the healthy performance in Direct. Near term outlook remained soft as clients reprioritize/defer some IT spends. Despite that, healthy order book, high exposure to relatively stable verticals, and new client additions, should help MPHL navigate these challenges.

* We upgrade our FY21/22E EPS by ~8%/6%, largely driven by (a) adjustments to our exchange rate assumptions and (b) EBIT Margin estimates (over FY21- 22E). Maintain Neutral.


In-line revenue; Better than expected margins

* In 4QFY20, Revenue (USD) / EBIT (INR)/PAT increased by 10%/20%/33% YoY respectively vs our estimates of 11%/14%/11% YoY.

* Revenue grew 1.5% QoQ (CC, v/s est. ~2.3%). Growth was driven by Direct International (2.7% QoQ, CC) while DXC revenue declined (1.0% QoQ, CC).

* Amongst verticals, growth was broad based with all verticals growing 1-2% except for IT/Comm/Entertainment which declined by 3.7%.

* Geography wise, Americas declined 1% QoQ while growth in Europe / RoW grew strong at 8%/9%. This was despite Americas facing COVID headwinds later than the other two geographies.

* Revenue from the Top client declined ~6.6% QoQ. Top 2-5 clients’ segment reported strong growth of ~3.6% QoQ.

* EBIT margin expanded 10bp QoQ to 16.3%. Increase in share of fixed price projects, cost optimization and favorable currency were the key tailwinds.

* 4Q witnessed the strongest order booking over past 6 quarters with deal wins of USD201m in Direct channel; Of this, 79% were in new generation.


Key highlights from management commentary

* Given the uncertainty in the environment, management hinted at a soft outlook on revenue growth. However, the company is confident of maintaining its margins by using levers such as – increase in share of Fixed Price Projects, fresher hiring, pyramid rationalization, automation and reduced travel costs etc.

* So far, there were no major demand dislocations. However, the company indicated that clients are re-prioritizing/deferring some IT spends.

* With supply issues in play, ramp-ups in April had been very tough but management is confident that the supply situation will stabilize.

* In the case of DXC, MPHL doesn’t foresee any force majeure event as of now. MRC of USD300mn is still due.

* Direct Core segment has been the growth driver and has seen strong deal wins, new clients additions.

* In terms of capital allocation, MPHL will maintain its 55-57% payout policy.


Valuation and view – Cautious about the near term risks

* Momentum in the direct channel remains robust and continues to drive overall growth. Recent deal wins may help mitigate near term uncertainty, to an extent. DXC business (~26% of revenues and strong growth driver over ~FY18-H1FY20) – continues to be soft. Restructuring at DXC adds a degree of caution to the outlook. However, outlook on the ability to defend margins is a key positive.

* While near term challenges exist, exposure to largely stable verticals (BFSI ~57% of revenues), may help in mitigating risks to some extent.

* The stock is currently trading at ~14x FY21E EPS, inline to its long-term rolling averages. We value the stock at ~13x FY22E EPS. Maintain Neutral.


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