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Buy Mphasis Ltd For Target Rs.1,899 - HDFC Securities

Our Take:

Mphasis on the back of its strong track record of customer centric approach is likely to benefit from vendor consolidation. The deal pipeline has increased by 75% YoY and its future outlook continues to be robust. Cloud spend has been pulled forward and has grown 3x in the deal pipeline. Mphasis is banking on the positive growth momentum in BCM (Banking & Capital market) and expects revenue conversion in Insurance on the back of a robust pipeline. Apart from this, the Direct business is expected to be a growth driver in H2FY21. Deal wins of US$ 360m in the Direct business (37% in new-generation services) is the highest ever TCV (total contract value) win reported in a quarter and Europe could come in with a strong pipeline. Deal wins crossed US$ 1bn for the first time in Q2 on TTM basis. Company has seen growth in number of large deals bagged (US$ 200mn+ TCV), with most of them being transformation-led and integrated in nature.

Mphasis has ability to win and construct large transformation deals, and looks at market share gains due to vendor consolidation, low legacy exposure given its ability to proactively win end to end digital deals, traction in Blackstone portfolio and exposure to relatively lesser impacted verticals due to pandemic. Company has not initiated any pre-emptive cost control measures and is continuing with its quarterly performance based increments.

Strong and consistent growth in Direct channel helped by mining of Blackstone portfolio companies and better timesfor Digital Risk business makes Mphasis one of the fastest growing IT companies despite sharp drag from the DXC business. Large deal win announcements including for Direct channel and clarity about DXC channel post MRC expiry in Sep’21 could be the triggers for the stock from hereon. Stake sale by Blackstone will be keenly watched for the price at which it will happen and also the impact of it on revenue momentum for Mphasis. Whether the new owner will bring another set of large heavyweight clients/relationships will be monitored.

Valuations & Recommendation: Mphasis is well positioned to capture the improving growth in the technology space led by its lower exposure to impacted verticals, improved traction in deal wins, strong relationship with top customers, customer stickiness and the integrated nature of services provided to clients. Mphasis has a strong record of retaining key customers, with an average tenor of 14-15 years that provides some operating stability. Its strong deal wins, healthy balance sheet and expectation of inorganic growth could bring earning visibility in medium to long term. We think the Base case fair value of the stock is Rs 1774 (21.0x Sept22E EPS) and the bull case fair value of the stock is Rs 1899 (22.5x Sept22E EPS) over the next 2 quarters. Investors can buy at LTP and add further on dips to Rs 1426-1436 band (17.0x Sept22E EPS). At the LTP of Rs 1616, stock trades at 19.2x Sept22E EPS.

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