Neutral Mphasis; target of Rs 2250: Motilal Oswal

Motilal Oswal's research report on Mphasis

MPHL’s 1QFY24 revenue performance (-3.5% QoQ CC) was weaker than our estimate (-1.2% QoQ CC) on account of persistent headwinds in the Direct business (incl. mortgage) and the ongoing moderation in the DXC vertical (- 10.5% QoQ CC). But the company delivered record deal closures in 1Q at USD707m (2x of average run rate). Despite a weak revenue performance in 1Q, the management is confident that growth will rebound in 2QFY24, driven by the bottoming out of its mortgage processing business (Digital Risk, DR) in 1Q and scale-up of large deals as clients resume spending. With the interest rate hike cycle coming to an end, MPHL is seeing early signs of revival in DR amid a pickup in volumes and capacity commitments. Additionally, the management indicated improvement in revenue conversion, which was impacted by slow decision making and cuts in discretionary spends over the last few quarters.

Outlook

We lower our FY24-25 EPS estimates by ~2% each on account of a 1QFY24 miss. We believe that the current valuation of 22x FY25E EPS fairly factors in near-term earnings growth. Our TP of INR2,250 implies 21x FY25E EPS.