Add Mphasis Ltd for the Target Rs 2,500 by Emkay Global Financial Services Ltd
Mphasis reported a softer-than-expected operating performance in 1Q. Gross revenue grew 1.8% qoq to $471mn (2.1% CC), below our estimate of $473mn. EBITM contracted by 60bps qoq to 14.8%, below our estimate of 15.3%, primarily due to higher hedge loss, new deal ramp-up costs, and costs related to the TAP acquisition (-35bps). The company won three large deals (including one valued over $100mn). Overall TCV was $461mn in 1Q, of which 63% was AI-led. Overall pipeline has grown to 2.8x since the Mphasis.ai launch and reached an all-time high at the end of 1Q. On TTM basis, TCV grew to $1.8bn, with AI-led TCV at $1.0bn. The management reiterated FY27 guidance of highsingle-digit to low-double-digit CC growth, an EBITM band of 14.75–15.75%, and OCF conversion at ~80% of net income, with 2Q positioned for the best sequential CC growth in three years. The Red Oak vendor-consolidation deal is baked into 2Q/FY27 guidance and is expected to start contributing partly during 2Q. We cut FY27-29E EPS by 1-4%, considering the 1Q performance. We retain ADD and TP of Rs2,500, on 20x Jun-28E EPS.
Results summary
Gross revenue grew 1.8% qoq (2.1% CC) to ~$471mn, below our estimate. Direct revenue grew 1.9% qoq (2.2% CC). EBITM declined by 60bps qoq to 14.8%, below our estimate of 15.3%. Net profit stood at Rs4.9bn, below our estimate of Rs5.2bn, mainly due to miss on operating performance. What we liked: Strong momentum in BFS and TMT; healthy deal intake and pipeline. What we did not like: Margin miss, softness in Logistics and Transportation, and weak cash conversion (46% OCF/EBITDA in 1Q).
TMT and Retail led growth; EMEA impacted due to revenue reallocation
The sequential revenue growth was led by TMT (15.5% qoq in CC terms), BFS (0.7%), and Others (Healthcare, Manufacturing, Retail, etc) at 5.2%, partially offset by decline in Logistics and Insurance, by 15.7% and 3.1%, respectively. The BFS deal pipeline was down 2% qoq and non-BFS was up 18%. By geography, growth was led by Americas (3.8% qoq in CC terms) and Others (5.5%), led by GCCs, while EMEA fell 15.4% on the back of revenue reallocation to other geographies for a globally structured deal.
Signed another customer contract acquisition deal for $28mn consideration
Acquisitions supported growth and strategic customer expansion, with OKIN and TAP contributing ~0.9% to qoq revenue growth (rupee terms). OKIN added Rs379mn to revenue with an immaterial profit impact, while TAP contributed Rs9mn to revenue but remained loss-making due to earnout accounting. The company also signed a definitive agreement with Red Oak Tech to acquire a customer contract relating to the consulting services business for a total cash consideration of up to $28mn (including contingent consideration of $15mn), which is expected to close by end-Aug/early-Sep-26, reinforcing its vendor consolidation strategy and expanding strategic customer relationships.
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