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Not out of the woods yet…

Q3 dragged down by Communication; Banking turnaround intact

USD revenue growth for Mphasis (MPHL IN) came in at just 1.6%, way below our and street estimates. This was despite a tailwind of ~USD 15mn from the Silverline acquisition. Excluding the Silverline fillip, revenue contracted 2.8% QoQ USD, in a sharp deterioration from the growth journey since the past two quarters, dragged down by the Communication vertical.

The QoQ growth was led by Insurance/ Logistics and Transportation, up 6.9%/3.2%, QoQ USD. Banking growth was at 0.9%, in keeping with the turnaround journey after QoQ contraction over last four quarters. This indicates ebbing concerns over regional banks’ health. ‘Others’ was up the most at 11%, in line with the results announced yet. The biggest drag was Communication, with a 9.1% QoQ USD drop. Adjusted EBIT margin was at 16%, up 50bps QoQ, ahead of our estimates. Headcount addition of 221 QoQ is a key positive.  

Banking – Green shoots visible     

Banking Capital Markets reported a growth of 0.9% QoQ in INR terms, after four quarters of revenue contraction. Insurance also fared well with 7.6% QoQ growth. Segmental gross margin improved 55/145/47bps for BCM/Insurance/logistics. The effort was to spike segmental margin across-the-board. This indicates better-quality deals and higher end work being done in the BCM vertical. With the interest rate cycle turning positive, growth for the top client may revive and MPHL may be the prime beneficiary given its highest exposure to BFSI among tier-II players.

Valuations: Retain Accumulate; TP raised to INR 2,710

We are positive as pain in mortgages seems to be ebbing (albeit slowly), revenue growth has turned around and margin sustainability is there. We factor in Q3 print and raise FY25E-26E EPS 2.5-7% on green shoots in Banking and positive fallout from the interest rate cycle turning favorable, thus the better performance by Mortgage. We maintain Accumulate, with a raised TP of INR 2,710 (from INR 2,380), on 25.5x Dec-25E, in line with five-year average adjusted with +0.5 STD.