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Order book continues to be strong…

About the stock: Mpahsis Ltd (Mphasis) offers application services, BPO and infrastructure services BFSI, Technology, communication & logistic services.

* The company’s direct international revenues have grown 22.5% YoY in FY21 and is expected to grow at a healthy pace in coming years

* OCF, EBITDA of 75% and double digit return ratio (with RoCE of 20%)

Q3FY22 Results: Mphasis reported strong Q3FY22 results.

* Dollar revenues increased 8.8% QoQ to US$414 million

* Adjusted margins (ex-impact of Blink) were at 15.9%

* Eighth consecutive quarter of US$200mn+ new deal wins

What should investors do? Mphasis’ share price has grown by ~6.5x over the past five years (from ~| 461 in January 2017 to ~| 3015 levels in January 2022).

* We change our recommendation on the stock from HOLD to BUY

Target Price and Valuation: We value Mphasis at | 3550 i.e. 32x P/E on FY23E EPS

Key triggers for future price performance:

* Strategy to mine top 10/20 clients, adding high potential new logos, increase in deal sizes & expansion in Europe bodes well for long term growth

* Further, management stability, improving deal size, market share gains via vendor consolidation, low legacy exposure and exposure to lesser impacted vertical to drive 23.4% CAGR growth in direct revenues in FY21-24E

* Improving revenue trajectory, higher offshoring, pricing, and automation to boost margins (90 bps to 17.0% in FY21-24E)

Alternate Stock Idea: Apart from Mphasis, in our IT coverage we like LTI.

* Industry leading growth and healthy margins prompt us to be positive on the stock

* BUY with a target price of | 8,050

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