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Muted sequential growth for the quarter; signs of moderation in demand environment

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 expectation. It reported constant currency growth of 1.0% QoQ, led by BFS vertical( up 5.7% QoQ) and Logistics and Transportation(up 1.5% QoQ). The INR reported growth of 3.2% QoQ was supported by depreciation of INR by 3.4% QoQ vs USD. Direct segment now contributes 93.7% to revenue; while DXC contribution has fallen to just 4.6% of revenue. EBIT margin was flat (up 2 bps QoQ) and it was able to maintain it within guided range. 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 35.2bn( up 3.2% QoQ in INR terms). Direct segment( 93.7% of revenue) grew 4.2% QoQ; while DXC( 4.6% of revenue) grew by 1.1% QoQ. The cc growth was 1% QoQ. The sequential growth was led by BFS segment that grew 5.7% QoQ,

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

* Reported net new TCV wins of $302mn in the Direct segment. (Vs $302mn in Q1FY23, $241 mn in Q2FY22).

* Offshore revenue mix grew 150 bps QoQ to 43.2%.

* Total headcount was down 23 QoQ to 36,876 employees. Offshore utilization including trainees was down 2pp to 68%.

* Cash and Equivalents of Rs 24.5bn vs Rs 31.1bn ( Q1FY23).

* DSO increased by 4 days QoQ to 67 days.

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