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Deal traction provides good growth visibility

Strong growth with stable margins to drive earnings, reiterate BUY

* MPHL’s 2QFY23 performance was led by a 2% CC QoQ growth in the Direct business and a 1% QoQ CC growth in DXC. Deal momentum remained intact with a strong net new TCV of USD302m. It also reported two large deal wins (USD110m) in 2QFY23.

* MPHL’s Direct business continued to be adversely impacted by the slowdown in its mortgage processing business, due to elevated interest rates. Additionally, it was negatively impacted by unexpected furloughs from client-specific issues. While we expect the drag in its mortgage business to continue given the unfavorable interest rate environment, it has good consolidation opportunities and should see strong growth once macro headwinds subside. With both DR and DXC verticals (10%+ of revenues) declining in the near term, we expect the revenue growth for MPHL to moderate to mid-teens in FY23 despite a strong demand momentum in the rest of Direct business.

* On the other hand, MPHL has delivered a stable margin performance over the last few quarters unlike its peers. It was able to maintain its 2Q EBIT margin at 15.3% with lower SG&A cost. Though it was at the lower end of its guidance of 15.25-17.0%, it has retained its guidance band and indicated an upside potential due to better utilization. We see the company as one of the very few in our coverage to deliver a margin improvement of 30 bp YoY to 15.7% in FY23. This should help it deliver an INR PAT growth of 20% over FY22-24E.

* With the DXC business exposure declining dramatically over the last two years, the drag on revenue growth from DXC has reduced materially and should be marginal by FY24 (MOFSLe: 3.8% of revenue). This should help reduce the negative impact on MPHL’s valuations.

* We have largely maintained our estimates for FY23/24. Given MPHL’s strong Digital capabilities and client relationships, it is well-positioned to be a key beneficiary in the current context. Our TP of INR 2,430 implies 22x FY24E EPS. We reiterate our Buy rating on the stock.

Inline performance

* 2QFY23 CC revenue grew 1.8% QoQ CC, INR EBIT grew 19% YoY, and INR PAT grew 17% YoY

* In 1HFY23, USD Revenue/ INR EBIT/ INR PAT grew 17%/ 20%/ 18% YoY, respectively

* The company registered direct revenue growth of 2% QoQ CC; DXC revenue declined 1% QoQ CC

* Utilization (excl. trainees) dipped 200bp to 72%; headcount declined by 23 Q2

* The company’s new TCV stood at USD302m, flat QoQ and up 25% YoY

* PAT was INR4.1b (up 4% QoQ) vs our estimate of INR 4.2b.

Key highlights from the management commentary

* Clients are increasingly looking for vendor consolidation in FY23 and MPHL would be a gainer in any such exercise by clients. There are further consolidation opportunities with the existing clients in the next two to four quarters.

* MPHL continues to see headwinds in mortgage portfolio (as counter cyclicality did not play out) and had unexpected furloughs due to client-specific issues in 2QFY23, stunting revenue growth.

* Core business (ex- mortgage, LBO) remains strong for MPHL. It sees good opportunity to consolidate in LOB as macro subsides. Mortgage being a core part of the US banks, it is expected to do well despite near-term blips.

* Utilization, pricing, ESOP, and M&A charges coming off are key margin levers. Also, there is good tailwind from offshoring

??Valuation and view

* Impressive deal wins and continued expansion in the pipeline would drive growth in the medium term. While the overhang from the DXC business (4.7% of revenue) persists, strong traction in Direct International should continue to drive overall performance. The management’s ability to defend margin is a key positive.

* MPHL’s ability to proactively win multiple large Digital transformation deals and gain wallet share indicates strength in its sales and delivery capabilities.

* The stock is currently trading at ~18.5x FY23E EPS. We value the stock at ~22x FY24E EPS. We reiterate our Buy rating on the stock.

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