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Mphasis reported weak operating performance in Q4FY23 with a sharp revenue miss and in-line margin. Gross revenue declined by 4.1% QoQ to USD412mn (-4.5% CC), reflecting continued weakness in DR (mortgage business) and tightening discretionary spending. Management expects the softness to persist in Q1 due to continued weakness in DR, client-specific issues, muted BFS, and delay in commencement of projects amid a challenging macro environment. DR business is expected to bottom out in Q1. Mgmt expects growth in the Direct (ex-DR) business to pick up from Q2FY24 and accelerate through to Q4FY24, driving growth in Direct (ex-DR) at the industry level or clocking higher in FY24 on healthy deal intake, stability returning in DR and strong deal pipeline, led by cloud, transformation and consolidation opportunities. Mphasis signed net new deals worth USD309mn (vs. USD401mn in Q3), including a >USD150mn deal with a BFS client. Mgmt indicated the deal pipeline growing 9% QoQ/35% YoY and non-BFSI share in the pipeline increasing to 64% (growing 52% YoY) which will act as the new engines of growth. Mphasis has guided for EBITM of 15.25-16.25% through all quarters of FY24 and expects the FY24 margin to be higher vs FY23. We cut our EPS by 6-7% for FY24E/25E, factoring-in the Q4 miss and the soft Q1FY24 guidance. We maintain BUY, with TP of Rs2,200/share (earlier, Rs2,370), at 21x Mar-25E EPS.

Result summary: Mphasis reported a 4.1% QoQ decline in gross revenue to USD412mn in Q4 (-4.5% CC), missing our estimate of USD429.2mn. DXC and Direct revenue declined by 24.8% and 3.4% sequentially, in constant currency terms. EBIT margin was flat QoQ at 15.3%, in line with our estimates. Net profit stood at Rs4.05bn, meeting our expectations of Rs4.08bn. the decline in revenue is attributable to weakness in Insurance (-11.3% QoQ in Rupee terms), BFS (-5.1%), and TMT (-6%), while ‘Others’ grew 2%, with Logistics & transportation flat QoQ. Geographically, growth was led by India (3.6% QoQ) and EMEA (1.4%), while the Americas and RoW declined sequentially by 5.3% and 3.0%, respectively. Mphasis signed net new deals worth USD309mn, of which 85% are in new-gen services. The company won 2 large deals in Q4, including a +USD150mn deal with a BFS client. What we like: Healthy deal intake, strong deal pipeline (up 9% QoQ, 35% YoY), steady progress across client buckets. What we did not like: Q4 revenue miss, continued weakness in mortgage, soft Q1 guidance, weak cash conversion (OCF/EBITDA ~43%/~60% in Q4/12M).

Earnings-call KTAs: 1) Mortgage business (DR) revenue contribution is at 6.4% of revenue vs 8.8% in Q3. DR revenue declined ~30% QoQ. Company highlighted that home equity has seen some pressure due to home price correction over the past few months. 2) DXC revenue sharply declined sequentially (down 24.8% CC). Management expects stability to return in the DXC portfolio in FY24. 3) Management highlighted that while enterprise digital transformation remains a core strategic priority for 2023, cost takeout and optimization requirements are also in great demand, given the uncertain macro environment. 4) The company has realigned GTM organization along the verticals, to ensure scalability and facilitate the next phase of growth. This will help deepen the wallet share and gain market share with existing and new clients. 5) Offshore utilization (excluding trainees) was at 79%, a sequential expansion of 500bps. 6) It added 4 new clients in Q4 and 13 for FY23; NCA continues to lead growth in Direct, increasing 39%, and contributed 22% of revenue in FY23. 7) The top-10 and top 11-20 accounts grew by 8.6% and 20%, respectively, in FY23, reflecting benefits from account mining and new growth engines, thus negating the weakness in mortgage and BFSI. 8) Company highlighted the improved utilization, deployment of freshers, lower hedge losses, revenue growth recovery, and SG&A leverage as key to driving the margin expansion in FY24.

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