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Stable quarter with strong deal wins, valuations capped

Quick Pointers:

* Beat on revenue while margin remains steady in Q2.

* Strong deal wins of USD 528 mn in Q2 including 6 large deals.

The revenue growth performance (+2.0% QoQ CC) was above our estimates (+1.2% QoQ CC), attributed to continued momentum within TMT and Insurance vertical. Slightly disappointed with BFS muted growth, which again derived over Q1 high base, partly attributed to softness in its top account (down 6% TTM), but grew sequentially. The performance beyond BFS was notable and even the deal pipeline is fairly diversified to other verticals, which reduces dependencies over banking-heavy top accounts. The new deal TCV at USD 528m (up 155% YoY) translates to USD2bn TTM deal TCV, while BFS and nonBFS pipeline was up 45% YoY and 139% YoY. We believe the company’s strong participation in AI-led transformation (69% AI-led deal pipeline), early investments in AI-led solutions, and equal play in the optimization/innovation areas, help it construct better value proposition and win large strategic deals. The consistent increase in large deal pipeline (180% YoY) and steady conversion rate (TCV to Revenue), which is missing in many of its peers, gives us confidence to stay positive on Mphasis. We are baking revenue growth of 6.5%/8.1% YoY CC with EBIT margin of 15.5%/15.7% for FY26E/FY27E. We roll forward to Sep’27 EPS and assign 25x PE, translates a TP of 2,950. Maintain ACCUMULATE.

Revenue growth:

MPHL reported revenue growth of 2% QoQ CC (1.8% in USD) came above our estimate of 1.2% QoQ CC growth. Growth was driven by Insurance & TMT segments which grew by 4.3% & 9.1% QoQ respectively while BFS & Logistic segments declined by 1% & 2.7% QoQ respectively. Direct revenue for the company reported growth of 2.2% QoQ CC and 7.9% CC YoY.

Operating Margin remain flat again:

EBIT margin remained flat for the fourth consecutive quarter at 15.3%, coming in above our estimate of 15.0% and the consensus estimate of 15.2%. During the quarter, gross margin declined by 100 bps QoQ; however, lower SG&A expenses and depreciation helped maintain EBIT margin. Management maintained its EBIT margin guidance within the band of 14.75%–15.75%.

Deal Wins remains strong: MPHL deal wins of USD 528 mn was strong after winning all time high deal wins in Q1. MPHL won 6 large deals during the quarter including USD 100 mn with a new BFS client and 2 USD 50 mn deals.

Valuations and outlook:

We estimate USD revenue CAGR of 7.7% and an Earnings CAGR of 13.1% between FY25-28E. The stock is currently trading at 28x and 24x its FY26E and FY27E earnings, respectively. We assign PE multiple of 25x to Sep 27E earnings to arrive at TP of INR 2,950. We maintain our Accumulate rating.

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