Buy Mphasis Ltd for the Target Rs. 3100 by Motilal Oswal Financial Services Ltd
Elevated DSO a fair price to pay for winning in a tough market
* Mphasis’s (MPHL) 4QFY26 revenue rose 2.5% QoQ in constant currency (CC), in line with our estimate of 2.5% QoQ CC. Direct revenue rose 3.3% QoQ CC and 9.2% YoY CC. TCV rose 4.4% YoY to USD407m. EBIT margin stood at 15.4%, above our estimate of 15.2%. Adj. PAT came in at INR5.1b (up 8.7% QoQ), below our estimate of INR5.1b.
* For FY26, revenue/EBIT/adj. PAT grew 12.6%/11.8%/11% YoY in INR terms. We expect revenue/EBIT/adj. PAT to grow 19%/18.9%/22% YoY in 1QFY27. RoE came in at 18.5% in FY26 (vs. 18.5%/18.6%/22.0% in FY25/FY24/FY23). The company has given 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. We value the stock at 24x FY28E EPS, arriving at a TP of INR3,100. We reiterate our BUY rating on the stock.
Our view: Steady FY26 exit sets the tone for a good start to FY27
* Steady execution with strong deal momentum; growth visibility improving but pace gradual: Mphasis delivered a robust quarter with revenue at USD463m (+2.5% QoQ CC), while FY26 growth came in at ~6.7% CC. Deal momentum remains the key positive -- net new TCV at USD407m in 4Q and USD2.1b in FY26 (+68% YoY), with ~64% of wins AI-led. Pipeline continues to expand (up ~38% YoY; ~69% AI-led), supporting visibility into FY27. Management guides for high single-digit to low double-digit growth; we model ~9.3% YoY cc growth for FY27.
* BFSI continues to anchor growth; other verticals still mixed: BFS (+5.8% QoQ cc) and insurance (+7.2% QoQ cc) remained the primary growth drivers, supported by large deal ramp-ups and wallet share gains. Pipeline build-up in BFSI remains strong, providing confidence in near-term growth. However, non-BFS segments remained uneven - TMT saw softness due to delayed decision-making, while logistics has stabilized but recovery is gradual and dependent on a few deal wins.
* Margins stable within band; reinvestment offsetting operating leverage: EBIT margin stood at 15.4% (+20bp QoQ), within the guided band of 14.75-15.75%. While margins ex-hedge expanded (~80bp YoY), reported margins continued to see hedge-related headwinds (likely through H1FY27). Importantly, productivity gains from AI-led delivery are being partly reinvested into platforms, GTM, and capability build-out limiting near-term margin expansion. We expect margins to remain range-bound with modest expansion of ~20bp to 15.5% in FY27.
* Cash conversion structurally lower as business mix shifts: Management has reset OCF/NI expectations to ~80% (vs. >100% historically, see exhibit 2), reflecting upfront investments in large, annuity-led and savings-linked deals. This is visible in recent trends - OCF/NI declined to ~66% in FY26 (vs. ~112% in FY25), despite steady growth in net income (~INR18.9b). While some normalization may happen as deals mature, cash conversion is likely to stay below historical levels at ~80-85% over the medium term.
* Working capital intensity remains elevated; DSO to stay higher: As seen in exhibit 1, DSO has trended up from ~mid-60s levels earlier to ~90 days currently, driven by higher exposure to fixed-price, milestone-based programs and large transformation deals. While management indicated part of the increase was timing-related (collections slipping into April), structurally higher deal sizes and billing constructs could keep DSO elevated compared to historical averages.
* Contract assets movement impacting working capital dynamics: The company highlighted a decline in contract assets (unbilled revenue) to receivables as milestones get accepted by clients. While this improves billing visibility and quality of receivables, it does not immediately translate into cash flows, thereby keeping working capital a bit elevated. In our view, an ~80% OCF/NI framework remains reasonable for a mid-cap IT services player, given the ongoing investments in large deals, AI platforms, and upfront client commitments.
Valuation and change in estimates
* We are positive on the BFSI exposure as it remains relatively resilient with strong deal momentum, which provides reasonable visibility on growth over the next few quarters. With strong TCV growth in FY26 (up 68% YoY) and large client issues now normalized, we see improving visibility on revenue growth over the next few quarters. Over FY26-28, we forecast a USD revenue CAGR of ~10% and an INR PAT CAGR of ~15%. We value the stock at 24x FY28E EPS, arriving at a TP of INR3,100. We reiterate our BUY rating on the stock.
Revenues in line with our estimates and beat on margins; four large deal wins in 4Q
* MPHL’s revenue of USD463m grew 2.5% QoQ CC, up 7.1% YoY CC in line with our estimate of 2.5% QoQ CC growth. For FY26, revenue stood at USD1,797m, up 6.7% YoY CC.
* Direct revenue was up 3.3% QoQ CC and 9.2% YoY CC.
* BFS/Insurance led the growth with 5.8%/7.2% QoQ cc increase, while Hitech/logistics declined 10.3%/3.7% QoQ cc.
* EBIT margin stood at 15.4% vs. our estimate of 15.2% QoQ. For FY26, adj. EBIT margin stood at 15.3% vs. 15.3% in FY25.
* Adj. PAT was at INR5.1b (up 8.7% QoQ) in line with our estimates of INR5.1b.
* TCV stood at USD407m (up 4.4% YoY). About 64% of the deal wins were in NextGen Services. For FY26, new TCV wins stood at USD2.1b.
* Offshore utilization (excl. trainees) decreased 200bp QoQ at 84%. Net headcount was down 0.3% QoQ in 4QFY26 to 31,179.
* The company has given 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.
* The company declared a final dividend of INR62/share for FY26.
Key highlights from the management commentary
* Demand environment remains constructive, with AI-led transformation increasingly acting as the primary driver across verticals and deal sizes.
* 80% of AI-driven transformation is expected to occur outside the IT function, shifting value creation to business domains such as supply chain, pricing, underwriting, and demand forecasting.
* Large infrastructure capex spend is expected to open up over the next 2-3 years, as enterprises modernize compute environments to support AI stacks - management sees this as a significant opportunity.
* Management does not see a scenario where clients reduce absolute tech spend; if anything, the mix is shifting toward tech spend vs. people spend - benefiting platform-oriented players like MPHL.
* Full-year FY26 net new TCV reached a record USD2.1b, up 68% YoY, supported by both large deal wins and broad-based mid-market activity.
* 69% of total pipeline is now AI-led; 64% of 4Q wins were AI-led, reflecting a structural shift in client demand toward AI-driven transformation.
* Acquisition of Theory and Practice and its Continuum AI platform significantly accelerates MPHL's decision intelligence capabilities - extending the stack from system modernization into enterprise decision transformation.
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