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Strong quarter and improving growth outlook

BFSI and US recoveries on track, but risks remain

* Mphasis (MPHL)’s 2QFY25 revenue was 2.5% QoQ in Constant Currency (CC), which was above our estimate (+2 % QoQ CC). Direct business grew 2.4%/6.2% QoQ/YoY in CC, aided by TMT and BFS. The Total Contract Value (TCV) was down 35% QoQ to USD207m. EBIT margin stood at 15.4%, beating our estimate by 10bp QoQ. PAT came in at INR4.2b (up 4.7% QoQ), led by lower depreciation and employee costs. For 1HFY25, net revenue/EBIT/PAT grew 6.6%/5.1%/5.1% compared to 1HFY24. MPHL targets a sustainable operating (EBIT) margin within the stated band of 14.6%-16%.

Our view: Strong quarter, but we remain cognizant of risks

* Strong Q2 results but we remain on the sidelines: While Q2 performance was solid, we maintain a HOLD rating as we await further clarity before taking a more positive stance.

* Key reasons for HOLD: Our caution so far has been driven by three main factors: (1) weak deal TCV, (2) top 5 clients' weakness, and (3) expectations of a slower recovery in US mortgage originations and refinancing.

* TCV weakness persists, but improvements in conversion visible: TCV remains weak; however, the improvement in revenue growth suggests that the Annual Contract Value (ACV) to TCV ratios are strengthening. This indicates a return of discretionary spending, short-cycle deals, and scope expansion projects that aren't captured in TCV. However, the headline TCV number must improve to build confidence in sustainable growth.

* BFSI sector recovery and mortgage market recovery: The Banking, Financial Services, and Insurance (BFSI) sector is recovering as management has indicated a bottom approximately three quarters ago. The company has also highlighted a recovery in its top client and the US mortgage market. That said, we remain cautious about the speed of the mortgage market rebound, believing it may occur in earnest in 2HFY25.

* Top client challenges: Despite recovery in the top client, the next four largest clients (top 2-5) reported a 4% QoQ decline. A significant logistics account also poses a risk to future growth. Although management has not reported any underlying issues, we believe this to be a potential headwind.

* Awaiting further evidence: While some signs of improvement are emerging, we are waiting for further clarity on TCV trends, client stability, and the US mortgage recovery before revisiting our position.

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 the cost takeout deals to transformation and modernization projects. However, we await clarity on the abovementioned risks before revisiting our position. While we have maintained our FY25 EPS projections, we have marginally increased our FY26/FY27 EPS estimates by ~1.0%/2.3%. Over FY24-FY27, we expect a USD revenue CAGR of ~9.8% and an INR PAT CAGR of ~12.8%. We raise our target multiple to 30x Sep’26E EPS. Our TP of INR3,400 implies an 11% upside. We reiterate our Neutral rating on the stock

Revenues beat estimates; margins expand sequentially

* MPHL’s revenue of USD421.1m grew 2.5% QoQ CC, up 6.3% YoY CC, which was above our estimate of 2% QoQ CC growth.

* Direct revenue was up 2.4% QoQ CC and 6.2% YoY CC.

* Hi-tech led the growth pack with 5.6% QoQ rise; BFS (~48% of revenue) grew 3.2% QoQ, while Insurance grew 1.9% QoQ.

* EBIT margin stood at 15.4%, beating our estimate by 10bp QoQ. PAT was at INR4.2b (up 4.7% QoQ) due to higher revenue and lower employee costs.

* TCV stood at USD207m (down 35% QoQ/19% YoY) vs. USD319m in 1QFY25. About 88% of the deal wins were in NextGen Services.

* Offshore utilization (excl. trainees) remained stable at 76% QoQ. Net headcount declined by 44 (flat QoQ) in 2QFY25.

Key highlights from the management commentary

* Monetary policy is easing, leading to expectations of a soft landing. The company aims to maximize value from transformation while staying focused on costs and ROI. It continues to execute in an environment that is steadily moving in the right direction. Its focus remains on the micro level as gradual improvements unfold.

* Stability in key verticals and geographies, with a continued trend of green shoots across the client portfolio. Growth requires a best-in-class tech landscape, and cloud remains relevant.

* The pipeline remains strong with broad-based growth across all chosen verticals, and the US pipeline was up 28% YoY. Continued higher share of proactive deal wins with a focus on deal-making. It closed six large deals in 1H and three in 2QFY25. Unexecuted/unconsumed TCV remains high, providing confidence going forward.

* The pace of converting TCV to revenue has picked up. The TCV-to-revenue conversion is steadily improving with ramp-ups and monetization accelerating. The company is witnessing good deal traction in IT operations and infrastructure, along with early signs of recovery in its mortgage business

Valuation and view – Reiterate Neutral

* MPHL indicated that BFS continues to see a recovery in discretionary spending, and its focus is now shifting away, albeit only slightly, from the cost takeout deals to transformation and modernization projects. However, we await clarity on the abovementioned risks before revisiting our position. While we have maintained our FY25 EPS projections, we have marginally increased our FY26/FY27 EPS estimates by ~1.0%/2.3%. Over FY24-FY27, we expect a USD revenue CAGR of ~9.8% and an INR PAT CAGR of ~12.8%. We raise our target multiple to 30x Sep’26E EPS. Our TP of INR3,400 implies an 11% upside. We reiterate our Neutral rating on the stock.

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SEBI Registration number is INH000000412