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Mortgage pain, client issues continue; strong TCV only solace

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

* The company’s direct revenue increased 35.7% YoY on a reported basis and 34.4% in CC terms in FY22

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

Q3FY23 Results: Mphasis reported weak Q3FY23 results.

* In CC terms, direct revenue declined 2.8% QoQ while the company’s revenue declined 2.5% QoQ

* EBIT margins were flat at 15.3%

* TCV remained healthy at US$401 mn in Q3

What should investors do? Mphasis’ share price has grown by ~2.9x over the past five years (from ~| 710 in January 2018 to ~| 2025 levels in January 2023).

* We maintain our HOLD rating on the stock

Target Price & Valuation: We value Mphasis at | 2070 i.e. 20x P/E on FY25E EPS.

Key triggers for future price performance:

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

* Further, the management stability, improving deal size, market share gains via vendor consolidation, low legacy exposure to drive 8.5% CAGR in revenues over FY22-25E

* Improving revenue trajectory, higher offshoring, pricing and automation to boost EBIT margins (+100 bps to 16.3% in FY22-25E)

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

* The company offers engineering & development services to aerospace, transportation, energy & utilities segments

* BUY with a target price of | 1,020

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