MphasiS has been a steady performer on the operational front since the last two years. Though the compounded (CAGR) growth in sales and net profit came in at 1.26 per cent and 0.97 per cent respectively, Ebidta (Earnings before interest, tax, depreciation and amortisation) margins have moved up to 28 per cent, as compared to an average 23.83 per cent between 2010 - 2016.
Though it reported a modest disappointment on US dollar revenues in the July - September 2018 quarter (Q2FY19), new-deal TCV (total contract value) of $210 million in Q2FY19 — the highest ever in Direct International Segment (DIS) – was encouraging, analysts say.
Going ahead, analysts expect the company to continue on the growth path, led by HP/DXC business segment and Blackstone portfolio opportunity.
Ashish Chopra, an IT analyst at Motilal Oswal Financial Services, explains, there are a lot of opportunities within the Blackstone portfolio companies. "Blackstone themselves have a lot of portfolio companies which are getting introduced to Mphasis and, which are beginning to buy IT services from Mphasis compared to their earlier vendors. So, that’s the low-hanging fruit of growth that they currently have."
On the flip side, Chopra mentions there do exist the risks to the continuity of the growth, especially from DXC channel, which will get sorted going ahead.
Other key segment that is expected to help the company deliver is BFSI (Banking, Financial services and Insurance) channel. The proportion of company’s financial services are significantly higher than most of its peers. So, nearly 57-58 per cent revenue would come from the channel, says Apurva Prasad, IT analyst at HDFC Securities.
Prabhudas Lilladher cautions that though Mphasis could fall behind other midcap peers on US dollar revenue growth for FY19, this should not be seen as a major concern from a medium-to-long term perspective.
“We model Mphasis’ EBIT margin at 15.9/16.4 per cent for FY19/FY20E (vs 15.1 per cent in FY18). Our EPS (earnings per share) estimates are modestly trimmed by 3.5/2//3 per cent to Rs 54/64/71.5/share for FY19/FY20E/FY21E, led by margin downgrade. Mphasis trades at 16.5x FY20 EPS," it said. The brokerage has lowered target price by 3 per cent to Rs 1,220 per share (18x Sep 20E EPS vs 18x earlier).