Mphasis shares slide as brokerages downgrade stock on growth uncertainty

1. Emphasis on expanding non-BFS verticals
2. Continued pursuit of large proactive deals
3. Increase in the number of clients with significant revenue potential ($100 million or more annually)

The intended outcome of these growth strategies is to achieve growth in the top quartile of the peer group in the medium term. However, as per experts in the short term, the company's growth could be impacted by the weakness observed among its large banking and insurance clients.

Most brokerages have downgraded or given a neutral rating to Mphasis shares. Mphasis collaborates with all top-10 US banks and maintains a presence across various sub-verticals within the BFS domain. The company is either the largest vendor or a strong contender among the top-5 accounts in this vertical.

"BFS will remain the cornerstone, and the company will focus on expanding non-US geographies while continuing to serve existing clients," Kotak Institutional Securities said. The brokerage firm expects margins to remain range-bound, with any surplus funds being reinvested in the business. However, caution is exercised due to the noted weakness in select large accounts and the ongoing uncertainty in demand.

Kotak has assigned a 'reduce' rating to the stock with a fair value of Rs 2,100. This decision is based on Mphasis stock trading at a relatively high valuation of 23 times the estimated earnings per share (EPS) for FY2025. "We appreciate the scalability of the business model but find it already adequately priced in the current market," the brokerage said.

ICICI Securities has also maintained a 'sell' rating with a target price of Rs 1,727, based on concerns surrounding the weak near-term growth outlook in the BFS segment (which accounts for 50 percent of revenue). The firm noted that non-BFS verticals have experienced growth lower than the company's average and remain at a sub-scale size (less than $250 million).

Mphasis ranks lower compared to peers in digital capability metrics, possesses weaker margins in comparison to mid-cap peers, and has not succeeded in significantly increasing its share among companies in the Blackstone portfolio. "Mortgage applications have not shown improvement, and there could be challenges in near-term growth in this business," ICICI Securities said.

Morgan Stanley has assigned an 'equal-weight' rating. It is supported by a target price of Rs 2,400. This rating is attributed to early signs of improvement compared to the last two quarters, although an inflection point in the flow business is yet to be observed. The company's diversification efforts, as reflected in recent deal wins, are contributing to a stronger outlook for the second half. Additionally, there is potential for gradual improvement in margins, and the confidence of the promoter further reinforces this perspective.

Motilal Oswal has given a 'neutral' rating with a target price of Rs 2,250. The firm notes that Mphasis is driving incremental growth by focusing on both vertical and horizontal strategies. While BFS remains a key vertical, the company is also scaling up through wallet share gains and diversifying its portfolio by targeting non-BFS units. Although there are signs of recovery in the mortgage business and improved revenue visibility in the BFS portfolio, the firm retained a 'neutral' tag due to anticipated near-term weaknesses in the direct business.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.