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We downgrade Mphasis to REDUCE from Add, as the stock has rallied ~25%/32% in 1M/3M, outperforming Nifty IT index by ~9%/10%, resulting in an unfavorable risk-reward. Q1 results are a mixed bag. Revenue declined 0.2% QoQ (-0.1% QoQ, in CC), falling short of our estimate of 0.9% growth mainly due to project completions in Healthcare after a strong enrollment season in Q4 (Others: -7.5% QoQ). Clients are looking to balance both, costsaving priorities in this challenging macro setting and the imperative of staying tech-forward and competitive. The mgmt observed gradual pick up in client engagements albeit slow uptick in investments, especially in transformative technologies. Mphasis reiterated target of clocking above-industry growth in FY25 which would be aided by its tech-led account-focused strategy. We largely retain our estimates (less than 1% change). We raise target multiple to 28x (from 25x), building-in a potential recovery in BFS with higher probability of a rate cut, and strong pipeline. We lift our TP to Rs2,900/sh at 28x Jun-26E EPS.

Results Summary

Gross revenue declined 0.2% QoQ (-0.1% QoQ/+3.1% YoY in CC) to US$410.0mn, missing our estimate of US$414.2mn. Direct revenue grew 0.6% QoQ (0.3% QoQ/4.1% YoY, in CC terms). DXC revenue declined 13.1% QoQ. EBITM was flat QoQ at 15.0%, in line with our estimate. Among verticals, Insurance, BFSI, TMT, and Logistics and Transportation grew 2.7% QoQ, 1.4%, 0.8%, and 0.3%, respectively, while Others (includes Healthcare, Manufacturing, Retail, etc) declined 7.8%. Within geographies, Americas, EMEA, and India reported 0.1%, 0.5%, and 1.2% growth, respectively, while RoW was flat sequentially. Revenue from the Top-10 clients (ex-mortgage) grew 1.2% QoQ CC. Mphasis signed net new TCV of US$319mn with 84% of the deal wins in newgen services. Total headcount declined 3.1% QoQ to 31,645. What we liked: Continued growth in BFS and healthy deal wins/pipeline. What we did not like: Revenue miss

Earnings call KTAs

i) The mgmt believes that despite faced with some challenges, the economy continues to be resilient backed by consumer spends, with increasing consensus around a soft landing. ii) Customers indicate tech remaining a top priority for them, as they seek to operate amid this duality and a cautiously optimistic environment. Investments are slowly inching up, especially in transformative technologies. iii) While efficiency and cost optimization are strong themes, organizations are seeking short-term wins for funding long-term technological priorities, with strong focus on resilience and growth. iv) Though discretionary spends remain similar to those in Q4FY24, there has been a gradual pickup in client engagement (witnessed green shoots in Q4, with the trend continuing in Q1FY25 as well). v) Mphasis announced launch of Mphasis NeoCrux, an industry-first tool designed to improve productivity of software engineers by streamlining the Software Development Lifecycle with the help of the GenAI powered Agent Orchestrator. vi) Mphasis signed three large deals Q1, including a >US$100mn deal in BFS, and one deal in Healthcare. TCV to revenue conversion continues to pick up pace. vii) More than 90% of wins are proactive deals. Overall pipeline grew ~17% QoQ, with broad-based pickup across the top-10 and non-top-10 accounts (up 31% QoQ), BFS (up 7%), and non-BFS (up 25%). One-third of the pipeline is AI-led. vii) The mgmt noted gradual recovery across major segments (especially BFS – the anchor vertical). There are signs of steady recovery in the mortgage segment, but the company has not made any major gains yet. ix) The company retained its target EBITM band of 14.6-16% for FY25.

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