IDFC Securities - Mphasis (MPHASIS) Mphasis Q3FY19 results (Outperformer) - Inline quarter

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IDFC Securities

Mphasis' Q3FY19 results (Outperformer) - Inline quarter

Q3FY19 result highlights

Strong growth and & Inline margin performance: Mphasis reported Q3 revenue growth of 2.6% QoQ (3.1% in CC terms, ~2.6% organic) at USD 282.6 mn (IDFCe: USD 279.2 mn) aided by healthy growth in both DXC/HP (6.4% in CC terms) and Direct core (6% in CC terms) despite ~USD 2 mn impact due to decline in Digital Risk. EBITDA margin was lower 60 bps QoQ at 16.8% EBITDA margin was lower 60 bps QoQ at 16.8% (IDFCe: 15.5%) due to wage hike in the quarter.
HP business traction continues: Direct International revenues grew on constant currency (cc) basis at 2.0% qoq and 8.4% yoy. DXC/HP revs grew 6.4% qoq and 28.3% yoy cc. DXC/HP business contributed 29% to revenues in Q3FY19. Management outlook is positive with company expecting Direct International to growth faster than industry and even HP/DXC channel should see steady growth. Deal signings momentum was weak this quarter due to seasonality (USD 122mn). Management continues to focus on maintaining win rates in next gen services.
Margin above our estimates and target band retained: EBIT margins came slighty above our estimates. Q3 margin was hit by wage revision in addition to weak seasonality. Despite these headwinds, the margin decline was restricted to 60 bps QoQ (at 16.8%). Management expects EBIT margin at 15-17% (FY19) aided by operational efficiencies.

Key positives: Growth in HP/DXC portfolio

Key negatives: De-growth in digital risk business.

Impact on financials: FY19E/FY20E/FY21E unchanged EPS.

Valuations & view

Mphasis’ deal wins has been steady in FY19 with seasonality impacting momentum in Q3FY19 (USD 122 mn vs. Q3FY18: USD 130mn). Management is focusing on increasing wallet share in existing accounts and leveraging Blackstone portfolio and expects the segment to grow ahead of industry. We expect revenue momentum to continue mid-teen growth under new management team. 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.

28/01/2019 8 EN

Underlying

Mphasis

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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INE356A01018 National Stock Exchange of India India

Provider

IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

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