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Mphasis (MPHL IN; NOT RATED) , at its 2023 analyst day, laid bare the underlying construct of its growth strategy. The company’s “inch wide, mile deep” strategy has helped it gain significant wallet share in its select, though large BFS accounts. Its pro-active deal pursuits (pre-RFP engagements) have helped improve win rates. Its repertoire of reusable archetypes allows for repeatable, referenceable and pro-active large deal wins. The company is trying to replicate this template across geographies – BFS led expansion in EU, industries – 4 non-BFS focus verticals and new account acquisitions (NCA). Mphasis has also benefited from crossselling to Blackstone’s (“Promoter”) portfolio companies. While the company aspires to grow in the top-quartile of industry over the long term, near-term outlook remains uncertain. The company did see decision making opening up in past few months, but feels it is nowhere near normalcy. Interestingly, the company believes clients are saddled with extra capacity due to excess hiring post Covid. This is putting pressure on outsourcing vendors as clients try to optimise cost. This ties with our thesis (Sliding back to “old normal”, 01 Aug 2023) that unwinding of “excess IT” spend post Covid could keep incremental dollar growth muted over the next few quarters. We remain cautious even as we monitor any signs of pick-up.

* Inch-wide, mile deep: BFS, in North America, remains Mphasis’ mainstay. The company works with 10 of the top-10 US banks and is a top-2 vendor in its top-5 BFS accounts. Still, the company sees significant headroom to grow within these accounts. Its presence in majority of BFS sub-verticals e.g card processing, mortgages, BPM etc helps it mine these accounts deep. The company is now using its BFS template – account led and repeatable deal archetypes – to diversify its vertical footprint. Even its new logo hunting is focussed on identifying select high TAM accounts and mining them deep. It reflects in 20/37 logos in Fortune 100/500 in its focussed non-BFS verticals - Insurance, TMT, Logistics and Healthcare. Besides, 19% direct revenue CAGR in non-BFS verticals over FY19-23, at par with BFS, suggests the strategy is working.

* Blackstone advantage: Blackstone’s wide array of portfolio companies, especially in BFS, allows Mphasis to cross-sell its offerings. Blackstone’s centralised structure for GTM, IT procurement of its portfolio companies, 40+ data science professionals and panel of think tanks facilitate leveraging portfolio companies for cross-sell. Mphasis has benefited from over USD 1bn of TVC awarded within Blackstone’s portfolio companies.

* Pro-active deal pursuits = high win rates: 95% of Mpahsis TCV wins have been from proactive deals. The company engages with clients on design thinking, proof of concept etc. even before an RFP (Request for Proposal) is floated. Prior engagements help Mphasis improve win rates. Its repertoire of reusable and composable archetypes help establish referenceability resulting in large deal wins (USD 10mn+) even in new logos. 70% of Mpahsis’ pipeline growth in past four years has been from large archetype deals.

* Margin trajectory - range bound: Despite revenue headwinds in the recent past, the company has been able to maintain EBIT margin in its guided band of 15.25-16.25%. The company’s value based selling approach means it prioritises value delivered to clients over margin maximisation (lower offshore etc.). Besides, it intends to reinvest additional margin gains into building capabilities – tuck-in acquisitions, talent, NCA channel. In fact, management alluded that it is more comfortable at lower half of the guided band.

* Outlook and read through for the sector: An uncertain macro is elongating decision cycles. However, some fatigue is now setting in as key decisions have been on hold for long, per the management. Few opportunities, especially cost-led, have moved to signing stage, though revenue conversion could still be slow. Interestingly, management believes extra (unbudgeted) capacity at clients’ technology teams – due to excess hiring in anticipation of higher attrition post Covid – is constraining their IT budgets. IT Services providers are bearing the brunt as clients release capacity from outsourcing teams to optimise spend. This supports our thesis that “excess” IT spend post Covid is now likely unwinding. We believe this could offset incremental revenues from new project starts to a large extent, at least over the next few quarters. We remain cautious.

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