Buy Mphasis Ltd for the Target Rs 2,700 by Motilal Oswal Financial Services Ltd
Stronger FY27 on the horizon Near-term growth visibility improving; margin outlook unchanged
* Mphasis (MPHL)’s 1QFY27 revenue grew 2.1% QoQ in constant currency (CC), broadly in line with our estimate of 2% QoQ CC. Direct revenue rose 2.2% QoQ CC and 9.9% YoY CC. TCV was up 13% YoY to USD461m. EBIT margin stood at 14.8%, below our estimate of 15.5%. Adj. PAT came in at INR4.9b (down 4% QoQ), below our estimate of INR5.4b.
* For 1QFY27, revenue/EBIT/adj. PAT grew 17.5%/13.5%/10.8% YoY in INR terms. We expect revenue/EBIT/adj. PAT to grow 15.0%/14.5%/16.2% YoY in 2QFY27. The company has reiterated guidance of high single-digit to low double-digit revenue growth, along with a sustainable EBIT margin range of 14.75%–15.75% backed by disciplined execution and 80% conversion of net income to operating cash flow. We value the stock at 21x FY28E EPS, arriving at a TP of INR2,700. We reiterate our BUY rating on the stock.
Valuation and changes to our estimates
* We remain positive on Mphasis, supported by healthy deal momentum and improving growth visibility. The company continues to build a strong pipeline, with AI-led opportunities now forming ~70% of the total pipeline, while large deal ramp-ups should support growth over the next few quarters.
* With management guiding for the strongest sequential growth in three years in 2QFY27 and retaining its FY27 growth outlook, we believe revenue visibility has improved, although execution of recent deal wins remains the key monitorable. Over FY26-28E, we forecast a USD revenue CAGR of ~10% and an INR PAT CAGR of ~14%. We value the stock at 21x FY28E EPS, arriving at a TP of INR2,700, and reiterate our BUY rating
Key highlights from the management commentary
* Management flagged a complex and uncertain macro backdrop, with the interest rate cycle reversing and the upcoming Fed meeting adding to unpredictability.
* Client caution was described as industry-wide rather than company-specific, driven by macro uncertainty, geopolitics, and AI disruption fears.
* Large infrastructure capex is expected to open up over the next 2-3 years. Management guided 2QFY27 to deliver the strongest sequential CC growth in three years, aided by ramping deal wins and the Red Oak vendor-consolidation deal.
* The pipeline has grown 2.8x since the launch of mphasis.ai and hit an all-time high in Q1; AI-related deals now form ~70% of the pipeline, up from 12% previously, and appear to be stabilizing at this level.
* The Red Oak vendor-consolidation deal is already factored into guidance; consummation is expected around end-August/early-September, with only partial quarter impact in 2Q. Typical consideration on such deals runs at 1.0 - 1.2x the revenue.
* Management framed the current AI cycle around closing the agency gap: the space between enterprise AI capability and the ability to govern and monetize it at scale.
Valuation and view
With management guiding for the strongest sequential growth in three years in 2QFY27 and retaining its FY27 growth outlook, we believe revenue visibility has improved, although execution of recent deal wins remains the key monitorable. Over FY26-28E, we forecast a USD revenue CAGR of ~10% and an INR PAT CAGR of ~14%. We value the stock at 21x FY28E EPS, arriving at a TP of INR2,700, and reiterate our BUY rating.
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