Mphasis' Q2FY19 results (Outperformer) - Inline revenues, margin miss
Q2FY19 result highlights
- Steady operational performance: Revenue growth of 2.6% qoq to US$275.6m (IDFCe:US$ 273.7m) , led by growth in HP/DXC (6.4% cc qoq), while EBIT margins decreased by 29bps qoq 16.4% (IDFCe: 17.6%). EPS grew by 3.6% qoq to Rs13.8 (IDFCe:Rs14.2). Hedging adjustment was at Rs -330m in Q2FY19 as compared to Rs-16 m in Q1FY19.
- HP business traction continues: Direct International revenues grew on constant currency (cc) basis at 0.7% qoq and 10.3% yoy. DXC/HP revs grew 6.4% qoq and 24.7% yoy cc. DXC/HP business contributed 28% to revenues in Q2FY19. 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 at the bottom end of their guided range. Deal signings momentum remains good with additional US$210mn of deal wins, 77% of deal wins are in new gen services.
- Margin below estimates but target band retained: EBIT margins came below than our estimates. Management mentioned that they will maintain EBIT margin range of 15%-17%. The current margin run-rate of 16.4% is at the upper end of the guidance band.
Key positives: Growth in HP/DXC portfolio
Key negatives: Margin miss & weak growth in direct
Impact on financials: FY19E/FY20E/FY21E unchanged EPS.
Valuations & view
A mixed quarter from Mphasis with continued outperformance in growth but miss on margins. Deal signings momentum remains good with additional US$210mn of deal wins, 77% of deal wins are in new gen services. We have liked the micro growth story of Blackstone portfolio and HP/DXC; and strong deal flow gives us greater confidence. We maintain our outperformer rating with unchanged Dec-2019 target price of Rs.1400.
Mphasis Limited is a information technology solution provider in cloud and cognitive services. The Company's segments include Banking and Capital Market, Insurance, Information Technology, Communication and Entertainment and Emerging Industries. The geographical segments include United States of America, India, Asia Pacific and Europe, Middle East and Africa. It offers cloud computing, cognitive solutions, digital services, securing businesses, application services and infrastructure services. The Company serves various industries such as banking and capital market which includes, retail banking, credit cards and payments, wealth management and brokerage, corporate banking solutions and investment banking technology. Its insurance industry includes, property and casualty, life and retirement and health. Its other industries consist of communications, energy and utilities, healthcare, life science, logistics, manufacturing and travel and transportation.
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