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Headwinds abating; Valuations reasonable

We believe Mphasis (MPHL IN) will be a key beneficiary of an improving US macro environment and BFSI vertical outlook as they contribute to 80% & 60%, respectively, to its revenue as on Q3FY25. Any improvement could serve as a booster shot to growth and profitability compared to peers. FY24 revenue performance was weak, due to a dip in the US mortgage business, weak macros, continued decline in (DXC) channel mix, as well as consolidation in its top accounts. These headwinds seem to be fading, due to improving US mortgage outlook, and green shoots of BFSI spending are likely to drive robust revenue growth. We also expect 60bp EBIT margin expansion over FY25- FY27E based on pyramid optimization, revenue recovery and offshoring focus. We initiate MPHL with a Buy rating and a TP of INR 3,170 based on 27x FY27E P/E.

Improving BFSI outlook and recovery in the US markets: MPHL has high exposure to the US market with a revenue mix of 81.5% as on Q3FY25 as well as BFSI vertical with a 60% revenue mix. As per service lines, application services form 72% of overall revenue mix. MPHL is the only mid-cap IT services firm that works with all Top 10 US banks. After robust revenue growth in FY22, it posted a weak performance during FY23-24, due to a revenue dip in the Digital risk (mortgage) business as well as continued drop in DXC revenue. Consolidation in the top accounts also left an impact. However, technology spend across US banks and financial institutions has been resilient and improving, which likely lends comfort to recovery in BFSI revenue. Improving outlook, continued strong (TCV) wins as well continued focus on large deals are likely to result in a USD revenue CAGR of 9.8% during FY25-27E and an INR revenue CAGR of 10.3% during the same period

Receding headwinds; EBIT margin to reach ~16% in FY27E: EBIT Margin came in at 15.3% in Q3FY25, and it has been able to sustain it in the range of 15-16% since FY18. The company has a stated philosophy of investing for growth while maintaining margins in the narrow band. Investment goes into building capabilities & competency as well as on GTM (Go To Market strategy) in terms of setting up large deal team, expanding coverage of accounts, expansion into new geographies etc. The company has guided for 14.6-16.0% margin band for FY25. We believe there are margin improvement levers, such as optimizing offshore-onsite mix, pyramid optimization, and revenue recovery from FY26, would aid in margin expansion of 60bp to 16% by FY27E.

Initiate with Buy rating and TP of INR 3,170: We expect an INR revenue CAGR of 10.3% and an earnings CAGR of 14.5% during FY25.-27E. The stock has declined 20% from the peak of Dec’24 and valuations are attractive now at 25x one-year forward P/E. It is trading at a 50% discount to COFORGE and 30% discount to PSYS. We initiate on MPHL with a Buy rating and TP of INR 3,170 on 27x FY27E P/E which is average valuations for last 3 years. Valuation discount to peers is on account of weak FY24 performance but with strong recovery US market and BFSI vertical, valuation gap likely to narrow in our view

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