Hold Mphasis; target of Rs 1440: Emkay Global Financial

Emkay Global Financial's report on Mphasis

Mphasis’ Q2 revenue performance was ahead of expectations, while margins were in line with expectations. Net revenue grew 6.4% QoQ to ~Rs24.4bn, driven by strong growth in Direct revenue. EBITM expanded ~40bps QoQ to 16.1%. Adj. net profit was ~Rs3bn. Direct revenue grew 9.7% QoQ (10.9% cc) to ~Rs19.8bn. Traction in the Digital Risk business, robust deal wins (US$360mn in Q2; ~US$1bn on LTM basis, +70% YoY) and healthy deal pipeline (up 75% YoY) impart confidence on growth sustainability. DXC revenue declined 14.9% QoQ to Rs3.9bn (-15.5% cc). DXC revenue run rate reached closer to MRC in Q2 (~6% higher than MRC). Mphasis remained focus on ensuring its relationship with DXC and building visibility beyond MRC tenure. ~US$200mn of MRC is pending, which will be consumed over the next four quarters.

Outlook

Strong execution and robust deal intake augur well for revenue growth, however, softness in Insurance and Logistic, continued weakness in DXC revenue and volatility in the Digital Risk business may restrict any material uptick in growth trajectory. Uncertainties over DXC revenue post the MRC period may weigh on stock performance. We assume coverage on Mphasis with Hold and a TP of Rs1,440 at 18x Sept’22E earnings.

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