Mphasis' Q1FY19 results (Outperformer) - Good execution continues

Q1FY19 result highlights

• Strong operational performance: Revenue growth of 2.9% cc qoq to US$269m (IDFCe:US$ 226.7m) , led by growth in HP/DXC (4.5% cc qoq), while EBIT margins decreased by 5bps qoq, but were above our estimates to 16.7% (IDFCe: 15.9%) driven by lower SG&A .EPS grew by 2% qoq to Rs13.2 (IDFCe:Rs12.4). Hedging adjustment was at Rs -16m in Q1FY19 as compared to Rs412m in Q4FY18.
• HP business traction continues: Direct International revenues grew on constant currency (cc) basis at 3.2% qoq and 14.8% yoy. DXC/HP revs grew 4.5% qoq and 23.3% yoy cc. DXC/HP business contributed 27% to revenues in Q1FY19. Management outlook is positive with company expecting Direct International to growth faster than industry and even HP/DXC channel should see steady growth. Digital risk performance was better this quarter but not yet calling a turnaround. Deal signings momentum remains good with additional US$153mn of deal wins,78% of deal wins are in new gen services.
• Margin execution good but target band retained: EBIT margins came better than estimates inspite of hedging loss of Rs.16 mn & were further led by better gross margins and lower S&M costs. Management mentioned that they will maintain EBIT margin range of 15%-17%. The current margin run-rate of 16.7% is at the upper end of the guidance band.

Key positives: Growth in both Direct and HP/DXC portfolio

Key negatives: No change in target EBIT margin band

Impact on financials: FY19E/FY20E EPS up by 2.8%/1.3%.

Valuations & view

Another steady quarter from Mphasis with continued outperformance in growth and margins. We expect the USD revenue growth to be better than industry (10% CAGR FY18-20E). Revenue beat and raise in our EBIT margin assumption by 68bps & 44bps for FY19E-FY20E leads us to upgrade our EPS for FY19E/FY20E by 2.8%/1.3%. We have liked the micro growth story of Blackstone portfolio and HP/DXC; and strong FY19 commentary and margin delivery gives us more confidence on business execution. Maintain Outperformer with revised target price to Rs1275 from Rs1060.