Neutral Mphasis Ltd For Target Rs.3,200 by Motilal Oswal Financial Services Ltd
Strong quarter and improving outlook
US BFSI recovery on track
Mphasis (MPHL)’s 3QFY25 revenue was 0.1% QoQ in Constant Currency (CC), in-line with our estimate of 0.2% QoQ CC. Direct business grew 0.2%/5.1% QoQ/YoY in CC, aided by Insurance and TMT. TCV was up 70% QoQ to USD351m. EBIT margin stood at 15.3%, in-line with our estimate of 15.2%. PAT came in at INR4.2b (up 1.1%/14.5% QoQ/YoY) vs. our estimates of INR4.3b. For 9MFY25, net revenue/EBIT/PAT grew 6.6%/6.7%/8.1% compared to 9MFY24. We expect revenue/EBIT/PAT to grow 8.9%/15.9%/17.6% on 4QFY25 YoY. MPHL targets a sustainable operating (EBIT) margin within the stated band of 14.6%-16%. We reiterate our Neutral rating on the stock.
Our view: Strong TCV win in 3Q; Revenue conversion to pace up
* Broad-based QoQ growth in key verticals: BFS grew 1.6% sequentially, driven by wallet share gains and strong execution in new account wins. TMT grew 2.9% QoQ, backed by deal conversions and proactive client engagement. The insurance vertical also saw robust 4.4% sequential growth, reflecting successful client mining and deal momentum.
* Strong TCV closures a key positive: MPHL reported USD351m in TCV closures in Q3 FY25, the highest in six quarters, with five large deals during the quarter. This was the most encouraging takeaway. We have remained on the sidelines for MPHL, as we believed a recovery in US mortgage applications was unlikely in the near term, and weak direct deal wins were a key sour point. We will turn constructive on the stock with sustained deal momentum and clarity on the logistics vertical.
* Weakness in logistics to be monitored: The logistics and transportation vertical faced notable headwinds due to macroeconomic pressures and client-specific issues. We await further clarity on the vertical despite management's indication that the challenges here are manageable.
* Stable margins despite seasonality: The EBIT margin remained steady at 15.3%, within the targeted range of 14.6%–16%. Operating profit grew 9.7% YoY, highlighting operational discipline amid investments in AI platforms, GTM capabilities, and large deal transitions.
* Good FY25E exit bodes well for FY26E: Management expects Q4FY25 to be the best sequential growth quarter in the last three years, driven by improving TCV-to-revenue conversion, increased pipeline visibility, and broad-based deal activity. We expect 4Q revenues to grow 3.5% QoQ in CC terms; this sets up a good exit for FY25, and we believe if H1FY26 momentum sustains, MPHL could post a double-digit growth in FY26E.
Valuation and change in estimates
MPHL indicated that BFS continues to see a recovery in discretionary spending, and its focus is now shifting away, albeit only slightly, from cost takeout deals to transformation and modernization projects. However, we await clarity on the abovementioned risks before revisiting our position. Our estimates are largely unchanged. Over FY24-FY27, we expect a USD revenue CAGR of ~7.9% and an INR PAT CAGR of ~11.5%. We value the stock at 28x FY27E EPS with a TP of INR3,200. We reiterate our Neutral rating on the stock.
In-line results but logistics declines 7% QoQ; deal TCV up 70% QoQ
* MPHL’s revenue of USD419m grew 0.1% QoQ CC, up 4.6% YoY CC, in line with our estimate of 0.2% QoQ CC growth.
* Direct revenue was up 0.8% QoQ CC and 6.6% YoY CC.
* Insurance led the growth with a 4.4% QoQ increase, followed by TMT (up 2.9% QoQ), while logistics and others declined 7.0%/5.9% QoQ.
* EBIT margin stood at 15.3% vs our estimate of 15.2% QoQ. PAT was at INR4.2b (up 1.1% QoQ) against our estimates of INR4.3b.
* TCV stood at USD351m (up 70% QoQ/46% YoY) vs. USD207m in 2QFY25. About 48% of the deal wins were in NextGen Services.
* Offshore utilization (excl. trainees) remained stable at 75% QoQ. Net headcount declined 407 (1.2% QoQ) in 3QFY25.
* Sustainable EBIT margin target range is 14.6%-16%.
Key highlights from the management commentary
* A continued recovery in discretionary spending has been observed.
* Vendor consolidation opportunities are emerging using the service-led transformation approach.
* The outcome of elections has brought clarity, enabling companies to plan budgets confidently, as tax cuts are likely to be extended, reducing uncertainty.
* For 4Q, the company expects continued execution as demand moves in the right direction, projecting it to be the best quarter on a sequential basis in the last three years.
* The company expects the pace of revenue growth to remain strong, driven by themes like cost savings and debt transformation.
* The company’s portfolio diversification strategy, particularly reducing dependency on BFSI, has proven beneficial, especially in the TMT segment.
* Revenue acceleration in managed services has improved due to reduced transition timelines, enabled by a combination of right-shoring and effort elimination.
* TCV for the quarter was USD351m, marking the highest in the past six quarters, and included five large deals.
* The workforce pyramid is being reshaped, with plans to infuse talent at the lower levels.
Valuation and view
MPHL indicated that BFS continues to see a recovery in discretionary spending, and its focus is now shifting away, albeit only slightly, from cost takeout deals to transformation and modernization projects. However, we await clarity on the abovementioned risks before revisiting our position. Our estimates are largely unchanged. Over FY24-FY27, we expect a USD revenue CAGR of ~7.9% and an INR PAT CAGR of ~11.5%. We value the stock at 28x FY27E EPS with a TP of INR3,200. We reiterate our Neutral rating on the stock.
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