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Muted performance on seasonality and macro concerns

Result Synopsis

Mphasis (MPHL) reported mixed financial performance for the quarter. The sequential revenue growth for the quarter was below estimates; while EBIT margin was inline with estimates. It reported constant currency growth of (3.1)% QoQ, led by Logistics and Transportation(up 2.3% QoQ) The INR reported growth was (0.4)% QoQ, supported by depreciation of INR by 3.9% QoQ vs USD. Direct now contributes 93.6% to revenue; while DXC contribution has fallen to just 4.8% of revenue. EBIT margin was flat at 15.3% and was able to maintain it within guided ranged. Employee attrition has started moderating for the company.

The long term demand environment remains robust led by adoption of cloud and data analytics across enterprises. However, the clients especially in select sectors have become cautious regarding the evolving macroeconomic situation and it poses near term risks. Also, Q3 would have its usual seasonal weakness due to furloughs. It is well placed to achieve EBIT margin guidance of 15.3-17% for FY23. Employee attrition is expected to further come down in H2FY23 and should support operating margin going ahead. We estimate revenue CAGR of 16.1% over FY22?24E with average EBIT margin of 16.0%. We maintain our ADD rating on the stock with revised target price of Rs 2,413/share at 23x (unchanged valuation multiple) on FY24E EPS. The stock trades at PER of 22.7x/19.5x on FY23E/FY24E EPS.

Result Highlights

* Reported revenue of Rs 35.1bn (down 0.4% QoQ in INR terms). The cc growth was by (3.1)% QoQ. Direct segment (93.6% of revenue) declined by 2.8% QoQ in cc terms; while DXC (4.8% of revenue) grew by 0.8% QoQ in cc terms.. The sequential performnce was led by Logistics & Transportation segment that grew 2.3% QoQ.

* EBIT margin was flat QoQ at 15.3% led by optimisation of operating costs.

* Reported net new TCV wins of $410mn in the Direct segment. (Vs $302mn in Q2FY23).

* Offshore revenue mix grew 160 bps QoQ to 44.8%.

* Total headcount was down 1,426 QoQ to 35,450 employees. Offshore utilization including trainees improved by 2pp to 70%.

* Cash and Equivalents of Rs 25.2bn vs Rs 24.5bn (Q2FY23).

* DSO increased by 1 day QoQ to 68 days.

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