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Margins impacted by one-off acquisition related cost

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 at 22.5% YoY in FY21 and is expected to grow at healthy pace in coming years

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

Q2FY22 Results: Mphasis reported muted Q2FY22 results on profitability.

* Dollar revenues increased 6.1% QoQ to US$385.2 million

* Adjusted (to one-off costs) margins were down 10 bps QoQ

* Expects Industry leading growth in direct and EBIT margin (15.5-17%)

What should investors do? Mphasis’ share price has grown by ~7x over the past five years (from ~| 445 in October 2016 to ~| 3254 levels in October 2021).

* Recent run up in price prompts us to maintain HOLD rating

Target Price and Valuation: We value Mphasis at | 3420 i.e. 36x 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 25% CAGR growth in direct revenues in FY21-23E

* Improving revenue trajectory, higher offshoring, pricing, and automation to boost margins (90 bps to 17.0% in FY21-23E)

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 target price of | 7,650

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