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* MPHL’s 4QFY23 performance was weaker than our expectations on account of a continued decline in its mortgage business (DR, down 23% QoQ). Again, other parts of the business were weak, with the DXC vertical down 24.8% QoQ CC and Direct revenue down 3.4% QoQ CC. As a result, overall USD revenue fell 4.5% QoQ CC. The deal TCV moderated, with net new TCV of USD309m (-11% YoY) v/s a record-high TCV of USD401m in 3Q.

* While the decline in DR (6.8% of revenue) was steeper than our estimate, the key surprise was the decline in Direct revenue excluding DR (down 1.1% QoQ), hit by delays in project ramp-ups across verticals. Management has indicated that the overall business is likely to remain muted in 1QFY24 as well and should start recovering from 2Q onward. With limited visibility in a turnaround in the US interest rate cycle (key factor for a recovery in DR), we remain cautious on FY24 revenue growth and factor in flat YoY USD CC revenue growth, the weakest in our IT services coverage.

* DXC (3.8% of revenues in 4Q) continues to decline and while the pace of moderation should slow down, it will remain an overhang, especially as the rest of the business remains under pressure. We expect MPHL to report a 7% CAGR in consolidated USD revenue over FY23-25.

* Despite favorable operating levers (79% offshore utilization), a weak topline performance should limit the company’s ability to improve its profitability in FY24 despite being at the lower end of its guided band of 15.25%-16.25%. We estimate EBIT margin at 15.4% in FY24 and 16.3% in FY25. This should result in INR PAT growth of 13% over FY23-25E.

* We lower our FY24-25 EPS estimates by 6-10% on account of a weak 4Q performance and FY24 outlook. The absence of topline growth remains a key overhang on the stock price. We believe that the current valuation of 16.3x FY25E EPS fairly factors in near-term earnings growth. Our TP of INR1,780 implies 16x FY25E EPS.

Weak topline growth; margins intact

* 4QFY23 CC revenue declined 3.1% YoY, INR EBIT grew 3.6% YoY, and INR PAT grew 3.4% YoY.

* In FY23, USD revenue/INR EBIT/INR PAT grew 7.8%/14%/13% YoY.

* Revenue at USD412m declined 4.5% QoQ CC, missing our estimate of a 1.1% decline. Direct revenue fell 3.4% QoQ CC. DXC revenue was down 24.8% QoQ CC.

* EBIT margin at 15.3% was in line with our estimate.

* Deal TCV of USD309m was down 23% QoQ and 11% YoY.

* Utilization (excl. trainees) rose 500bp to 79%. Headcount fell by 1.4k in 4Q.

* PAT was up 3.4% QoQ at INR4.1b v/s our estimate of INR4.2b.

* Q4 Cash conversion (OCF/EBITDA) was weak at 35%.

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