Mphasis Stock Research Report

BFS recovery comes in full swing

MPHL’s Q2FY25 growth exceeded our and consensus estimates with 2.4% CC growth, led by: 1) BFS and TMT growth; 2) stabilisation in ‘others’; and 3) robust TCV to revenue conversion. Mortgage volumes are also picking up, led by Fed’s rate cut. This is in-line with our view regarding green shoots emerging in BFS and hi-tech’s downturn having bottomed out. Management’s commentary regarding the macroeconomic environment has been positive but cautious. Q4 is expected to fare well and usual furlough-led seasonality may be seen in Q3. TCV was down 35.1% QoQ; but the pipeline remains robust and well diversified with AI-led deals constituting 35% of the pipeline. The target margin range has been maintained at 14.6–16%. Maintain ADD with INR 3,360 TP, at unchanged 30x P/E on Q3’ 26-Q2’ 27 EPS with slight tweaks to FY25-26 EPS.

Robust growth

MPHL reported 2.4%CC/ 2.7% USD growth, slightly ahead of I-Sec/Street’s estimates of 1.7%/2% CC growth. Direct business was up 2.7% QoQ USD/ 2.4% CC. Direct growth was driven by banking and capital markets, growing a handsome 3.6%. Insurance also showed robust growth of 2.3%. This is in line with our expectations around MPHL’s BFSI vertical’s recovery led by Fed’s rate cuts given the company has the highest exposure to the vertical (at 47.9%) within tier-II players. Top clients grew by 10% QoQ USD. The only concerning point is the TCV of USD 207, down 35.1% QoQ. New gen formed 88% of MPHL’s deals. A positive surprise is the DXC business expanding 4.5% QoQ, after growth staying flat or contracting in the last 18 quarters.

Broad-based BFS pickup; focus on execution going ahead

Mortgage business saw a volume uptick in Q2. The non-mortgage business accelerated too. The consumer segment is also gaining momentum with NII expansion. Gradual reopening of capital markets is happening. Banking and capital market showed 1pps QoQ expansion in its segmental margin. Deal conversion has been steady/improving and BFS/non-BFS pipeline continues to grow. Healthcare pipeline has been robust over the last few quarters. Management is intent on driving execution, focussing on the micro. Q3 is expected to have regular seasonality. Q4 shall be better than Q3. Management is confident of being able to stick to its target EBIT margin range of 14.6–16%.