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Mortgage business volatility and deal pushouts to weigh on FY25

Margin improvement to be gradual

* Mphasis (MPHL)’s 3QFY24 organic revenue performance (-2.8% QoQ) was in line with our estimates owing to higher-than-usual furloughs and continued softness within the mortgage segment. Consolidated USD CC revenue growth was 1.0% QoQ, with direct revenue growth (incl. inorganic) of 2.0% QoQ CC. The TCV further moderated to USD241m, although the YTD TCV looks attractive at USD1.2b (BTB at 1.0X).

* MPHL’s revenue performance has been volatile over the last few quarters. The banking-heavy portfolio (~47% of revenue), with high dependency on discretionary areas, is hurting its near-term growth performance. The selective pockets within BFS (Mortgage, IB, and Capital Market) have been under stress, which is leading to a volume pressure in the segment. Additionally, the uncertainty around the US interest rates and its exposure to regional banks remain a headwind for its banking-heavy top-10 accounts.

* Management indicated that the mortgage business has bottomed out in 3Q and has witnessed some structural improvement, which should aid the overall growth in 4QFY24, along with a partial reversal of some of the furloughs impact given the ramp up in earlier wins within the segment. We believe the interest rate uncertainty should keep the BFS clients under caution, before they start resuming their discretionary spending. Moreover, we believe the earlier investments to revive growth within the non-BFS accounts are yet to get materialized and reach a steady state.

* We are broadly keeping our FY24E EPS unchanged while trimming the revenue growth estimates for FY25E/FY26E by 180bp/30bp. We believe the continued volatility within its mortgage business will take a longer time to recover before it reaches a steady state and contributes to the BFS growth.

* Management has demonstrated its ability to maintain margins in a tight range despite having integrated Silverline to its portfolio. We expect FY24 margin at 15.2% (at the lower end of the guided rage of 15.25%-16.25%), before improving to 15.3%/16.1% in FY25/FY26. This should result in an INR PAT growth of 17.1% over FY24-26E. We believe that the current valuation of 23x FY26E EPS fairly factors in the near-term earnings growth. Our TP of INR2,600 implies 23x FY26E EPS. Reiterate Neutral.

Strong execution on margins; deal TCV moderates

* Revenue of USD402.3m, up 1.0% QoQ CC, was in line with our estimates. The revenue includes contributions from Silverline, with organic USD growth at -2.8% QoQ (as per our estimate).

* Direct revenue was up 2.0% QoQ CC and down 3.3% YoY CC.

* Insurance led the growth pack with 6.9% QoQ; BFS (~47% of revenues) was flat QoQ, while TMT was down 9.1% QoQ.

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