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Good deal traction and stable margins to drive earnings

but mortgage slowdown to impact near-term growth adversely

? MPHL’s 1QFY23 performance was led by a 2.4% QoQ growth in CC in the Direct business (v/s estimate of +3.5% QoQ CC), while DXC declined 6.3% QoQ CC (v/s estimate of -3% QoQ CC). Deal momentum was intact with a strong net new TCV of USD302m and an all-time high pipeline (up 6% QoQ). It also reported a large deal win (of USD60m) in Jul’22.

? MPHL’s Direct business was soft in 1QFY23 due to slowdown in its mortgage processing business (DR) led by elevated interest rates and weakness of a few European clients. While we expect the drag in its mortgage business to continue given the interest rate environment, the growing share of non-rate sensitive business (50%+ of DR in 1QFY23) should reduce the intensity of the impact. However, with both DR and DXC verticals (10%+ of revenue) declining in the near term, we forecast MPHL’s revenue growth to moderate to midteens in FY23, despite strong demand trend in rest of the Direct business.

? Conversely, MPHL has delivered a stable margin performance over the last few quarters, unlike its peers that have reported material weakness on supply constraint. While the 1QFY23 EBIT margin of 15.3% was at the lower end of its guidance range of 15.25-17.0%, management has retained its guidance band and indicated upside potential due to better utilization and ramp up of fresher hiring. We see the company as one of the very few in our coverage to deliver margin improvement in FY23E to 15.8% (+40bp YoY). This should help it report a PAT growth of 19% over FY22-24E in INR terms.

? With the DXC business exposure contracting dramatically over the last two years, the drag on revenue growth from DXC has reduced materially and should be marginal by FY24E (MOFSLe: 3.4% 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 INR2,600 implies 24x FY24E EPS. We maintain our BUY rating on the stock.

Earnings miss due to slower growth in Direct

? MPHL’s revenue grew 2% QoQ in CC to USD436m, 120bp below our estimate. EBIT/PAT rose 22%/18% YoY in 1QFY23, respectively, in INR terms

? Revenue from Direct grew 2.4% QoQ in CC v/s estimate of +3.5% QoQ. Revenue from DXC dipped 6.7% QoQ in CC (v/s our estimate of 3% decline).

? The on-site revenue mix was largely flat. Utilization (excluding trainees) contracted 300bp. MPHL added 365 employees (the lowest in the last eight quarters) in 1QFY23.

? New TCV decreased 13% QoQ and 40% YoY to USD302m.

Key highlights from the management commentary

? There is a higher impact of the current macro environment in Europe as deal timelines are getting stretched. However, management is not seeing any impact in current pipeline.

? It has added other verticals in Digital risk that will take a few quarters to scale up. Digital risk as a portion of overall business is likely to shrink.

? Pricing, growth leverage and pyramid underpin its FY23 margin outlook.

Valuation and view

? Impressive deal wins and continued expansion in the pipeline would drive MPHL’s medium-term growth. 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 ~21x FY23E EPS. We value the stock at ~24x FY24E EPS and maintain our BUY rating with a TP of INR2,600.

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