Add Mphasis ltd For Target Rs.2,500 By Emkay Global Financial Services Ltd
Mphasis delivered healthy operating performance in Q4. Gross revenue grew 2.5% QoQ to ~USD463mn, in line with our estimate. Growth was led by momentum in BFS and Insurance. EBITM increased by 20bps QoQ to 15.4%, above our estimate of 15.2%. The company won four large deals and overall TCV of USD407mn in Q4 – 64% being AI-led. On TTM basis, TCV grew ~68% YoY to ~USD2.1bn, with AI-led TCV up >2x to USD1.3bn. An otherwise strong quarter was marred by soft OCF/EBITDA at 25%, dragged by system-related delays in customer remittances, reflecting poor cash conversion. The management expects
i) BFS and Insurance to continue anchoring growth
ii) TMT to return to sequential growth in Q1
iii) logistics to gradually recover through FY27
iv) hedge losses to persist through H1FY27, with tapering only in H2, limiting the benefit of rupee depreciation
v) FY27 revenue growth at high single-digits to low double-digits in CC terms (double-digit growth requires ~2.7% CQGR), supported by disciplined execution and increasing demand for AI-led transformation, with EBIT margin maintained at 14.75–15.75%
vi) OCF/NI conversion at ~80% for FY27, reflecting working capital investments tied to year-one client savings on annuity large deals. We cut FY27-28E EPS by ~3%, considering the Q4 performance and weak cash conversion. We retain ADD and TP of Rs2,500, on 20x Mar-28E EPS.
Results summary
Gross revenue grew 2.5% QoQ in USD and CC terms to ~USD463mn, in line with our estimate. Direct revenue grew 3.2% QoQ (3.3% CC). EBITM increased by 20bps QoQ to 15.4%, above our estimate of 15.2%. Net profit stood at Rs5.1bn (up 15.3% QoQ/14.1% YoY), above our estimate of Rs4.9bn, mainly on operating performance beat. Top 5/10 client revenue grew 5%/4% QoQ. The Board proposed a final dividend of Rs62 per share. What we liked: Strong momentum in BFS and Insurance; robust deal intake and pipeline. What we did not like: Softness in TMT; weak cash conversion (~25% OCF/EBITDA in Q4).
BFS and Insurance led growth; performance by geography mixed
The sequential revenue growth was led by BFSI, with Insurance growing 7.2% QoQ in CC terms, followed by BFS at 5.8% and Others (Healthcare, Manufacturing, and Retail, etc) at 5.1%. TMT and Logistics fell 10.3% and 3.7% QoQ, respectively. The BFS deal pipeline was up 89% YoY and that for non-BFS was up 6%. By geography, growth was mixed: Americas grew 9.5% QoQ in CC terms; EMEA was flattish and RoW fell 9.4%.
Strategic acquisition of TAP to bolster AI stack
The company announced the acquisition of Theory and Practice Business Intelligence Inc (TAP) for a cash consideration of up to ~Rs2bn/CAD30mn. TAP has developed Continuum AI, a decision intelligence platform, that adds a critical decisioning layer to Mphasis' NeoIP. This would extend the company’s stack beyond systems modernization into enterprise decision transformation. It also acquired certain customer contracts of OKIN relating to its BPO services for a cash consideration of up to ~Rs0.5bn/USD5.5mn.
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