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Gains from tech-led and account-focused strategy; Recovery in BFS visible

Mphasis reported Q2FY25 gross revenues at $421mn (inline with our estimates), up 2.4% QoQ and 5.4% YoY in constant currency. Gross Revenue grew 2.7% QoQ and 5.8% YoY in USD terms. Net Revenue in INR stood at INR35,361mn, up 3.3% QoQ and 7.9% YoY. Company reported new deals with TCV of $207mn in Q2FY25 with 88% of the deal wins in New-Gen Services. Mphasis has won 3 large deals in Q2FY25. During H1FY25, TCV wins stood at $526mn, with 6 total large deals in H1FY25. PAT for the quarter stood at INR4,233mn, up 4.7% QoQ and 8.0% YoY, with EPS at INR22.4.

* AI implementation across industries: There is a growing emphasis among enterprises to implement AI at scale across various industries, as businesses strive to maximize the value of their transformations while maintaining a keen focus on costs and ROI. As AI adoption accelerates, many clients are progressing toward becoming AI-first organizations by re-architecting their systems to incorporate an AI-centric framework, rethinking processes to include lightweight services, and evolving their operating models to leverage AI-augmented solutions. This shift is expected to foster an AI-driven economy that fundamentally transforms enterprise operations. Additionally, there is a rise in AI-led solutions that utilize digital workers or AI agents, which function autonomously as collaborative partners capable of decision-making and executing tasks with minimal human intervention. Notably, the company’s pipeline reflects this trend, with 35% dedicated to AI-related projects. Opportunities abound in various areas, particularly in agile methodologies, IT operations, next-gen operations, and data engineering and modernization, indicating a robust future for AI adoption across industries.

* Outlook for FY25E: Company enters the second half of the fiscal year with a robust pipeline, highlighting consolidation and modernization opportunities that stem from a savings-led transformation strategy. This focus is fostering widespread adoption of AI among its customers. There are signs of improved revenue conversion, along with an accelerating pace of ramp-ups and better monetization of the order book. Looking ahead to Q3, the company anticipates normal seasonal trends, with growth primarily driven by the BFS vertical and a recovery in the mortgage sector while focusing on converting TCV to revenue. It remains committed to maintaining its revenue guidance for FY25E, reflecting confidence in achieving steady and sustainable growth through focused execution on micro-level factors.

* Margins to remain range bounded: Operating margins for the quarter came in at 15.4% (+39bps QoQ and flattish YoY) remaining in the stated band while investing for growth. Management retains its message of sustainable and steady margins in the band of 14.6%- 16% for FY25E. Focus to remain on productivity, efficiencies and operating leverage.

Valuation:

Despite ongoing challenges, the macroeconomic environment is improving, with increased AI adoption among clients enhancing efficiency and accuracy while the savings-led transformation thesis remains central to the company’s solutions, significantly boosting service delivery and client savings. We have introduced FY27E and expect Revenue/EBIT/PAT to grow at a CAGR of 11.1%/15.2%/15.9% respectively over FY24-FY27E. We upgrade our rating to BUY to arrive at a target price of INR3,361 implying a P/E of 29x on Sep-FY27E EPS of INR116.

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