Prabhudas Lilladher's research report on Mphasis
Mphasis Q4 performance was in-line with consensus estimates. Management guided industry leading growth in Direct business to continue given -1) FY22 TCV of $1.428 Bn +28.5% YoY USD, 2) strong client mining ability (2 clients in $150Mn+ bucket and 6 in $75mn+ bucket), 3) tribes led pipeline up 16% YoY in Q4, 4) ability to win large deals (deal size up 2x in 2 years) and 5) expansion of addressable market led by newer competencies (including M&A). Increase in number of large deal wins (5 in Q4 and 12 in FY22) with increasing deal sizes improves visibility over medium term. Mphasis has widened EBIT margin band (15.25%-17%) and lowered the lower end of guidance band by 25bps. Though the company has been most consistent in maintaining margins (15-16% FY17-FY21), we expect margins to be near lower end of guidance in FY23 factoring in higher manpower costs, investments for growth and return of travel and facility costs. We believe higher onsite revenue share (~58%) for Mphasis compared to peers will add to wage inflation pressures.
Outlook
Our EPS estimates decrease by 5.8%/3.7% led by cut in margin estimates by 80bps/50bps in FY23/24. We arrive at DCF based TP of Rs. 3379 (earlier Rs. 3755) with implied target multiple of 31x on FY24 EPS (earlier: 33x) led by increase in risk free rate and moderation in long term growth rate. Mpahsis is currently trading at 31x/26x on FY23/24 EPS of 90/108 respectively with Revenue/EPS CAGR of 17%/19% over FY22-24E. Maintain Buy .
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