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Mphasis reported weak operating performance in Q3 due to the miss on revenue. Gross revenue grew 1% QoQ (organic revenue declined 2.8%) to USD402.3mn, logging below our estimate of USD414.9mn. EBITM fell by 60bps QoQ to 14.9%, in line with our estimate and includes a 110bps impact from the Silverline integration. Higher than usual furloughs hit revenue growth in Q3, although Management highlighted signs of stability returning to business. BFS continues to face headwinds from weakness in some pockets, while stability is seen reappearing in the mortgage business. Mphasis signed net new deals worth USD241mn (85% of deal wins in new-gen services), taking the 9MFY24 deal intake to USD1.2bn, up 20% YoY. Company is observing pick up in conversion of TCV to revenue. It expects sequential revenue growth to resume from Q4, on account of reversal of furloughs, bottoming of mortgage, improving conversion from deal TCV to revenue, and deal wins & pipeline. We cut FY24- 26E EPS by 2-3%, factoring-in the Q3 performance miss. We maintain REDUCE on Mphasis, with revised TP of Rs2,700/share at 26x its Dec-25E EPS.

Result summary

Gross revenue grew 1% QoQ to USD402.3mn, missing our estimate of USD414.9mn. DXC revenue declined 9.5% QoQ, while direct revenue grew 2% QoQ (organic declined 2%). EBITM fell by 60bps QoQ, in line with our estimates, impacted by the Silverline integration (110bps) and partially offset by operational rigor (50bps). Revenue growth was led by insurance (6.9% CC QoQ), logistics & transportation (3.2%), BFS (0.3%), and emerging industries (11.0%), while TMT declined 9.0%. Among geographies, Americas grew 2.9% QoQ, while EMEA, India, and RoW posted de-growth of 1.7%, 5.9%, and 4.5%, respectively. Mphasis signed net new deals worth USD241mn (USD1.2bn in 9MFY24, up 20% YoY), of which 85% are in new-gen services. The deal pipeline remains healthy (up sequentially, in double digits) and is well distributed across verticals, driven by data modernization, Agile IT Apps, and platforms. The company signed four large deals in Q3 (14 in 9MFY24). Its top-10 accounts declined 7.5% CC YoY, mainly due to higher than usual furloughs and regional banking issues in the USA. What we like: Healthy cash conversion (OCF/EBITDA at ~98%), margin defense, and healthy deal pipeline. What we did not like: Q3 revenue miss, delay in recovery in organic revenue growth recovery, softness in top clients

Earnings call KTAs

i) Company continues to witness bottoming of revenue, which is playing out even if the seasonality hit is ruled out. Pressure on discretionary spend as well as seasonality impacted growth QoQ in the Applications segment. While macro headwinds persist, clients are also fast-tracking to newer sources of value, such as AI, to stay ahead. ii) Mortgage business is stable, aided by new deal wins. iii) The deal pipeline remains healthy across BFS and non-BFS, backed by proactive pursuits that contributed to 81% of the pipeline. Large deals continue to bob up in the pipeline, even as an uptick is also being seen in smaller deals, thus providing better visibility to revival in discretionary deals, while also boosting the pace of revenue conversion. The healthy mix of large deals in the pipeline reflects in the ongoing digital transformation, and the accelerating digital adoption remains the core theme for clients. iv) Management expects revenue growth to recover from Q4, led by BFS and TMT. It expects growth rebound to be beyond seasonality. v) Revenue growth on YoY basis was impacted by softness in discretionary spending, regional banking issues, weakness in mortgage business, and insourcing challenges. vi) Excluding M&A charges, Management retains its target EBITM range of 15.25-16.25%. vii) Silverline contributed ~USD15mn in Q3, and was lower than the previously disclosed CY22 revenue run-rate, as MPHL is more focused on the enterprise segment, while Silverline focus is a combination of both, enterprise and mid-market.

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