MOSL: MPHASIS (Upgrade to Buy)-Core momentum intact; risk-reward favorable
MPHASIS: Core momentum intact; risk-reward favorable
(MPHL IN, Mkt Cap USD2.5b, CMP INR930, TP INR1120, 20% Upside, Upgrade to Buy)
- Steady revenue; margins correct due to out-of-turn hikes: MPHL's 1QFY20 USD revenue grew 11% YoY (+1.8% QoQ; our estimate: 12.3% YoY/3.5% QoQ) to USD297m, EBIT increased 6% YoY to INR3,193m (in-line) and PAT was up 2.5% YoY (our estimate: -1.4% YoY) to INR2,647m. In CC terms, revenue growth stood at 2.0% QoQ (our estimate: +3.6% QoQ). EBIT margin shrank 30bp QoQ to 15.5% (in-line; -220bp QoQ to 15.4% excluding hedge gain).
- Momentum in Direct Core and DXC/HP dragged by Direct Emerging: Growth in Direct Core business stood at 2.7% CC QoQ, while DXC/HP grew by 2.5% QoQ. This was partially dragged by slowdown in Direct Emerging business, led by softness in non-strategic ATM business. MPHL recorded USD151m of deal wins in Direct Channel, of which 80% were in new-gen services. These do not include renewals, but include both Direct Core and Non-Core. New-gen services now contribute 51% of total revenue.
- Ex-hedges, margins impacted by mid-cycle wage hikes: Par-wage hikes for MPHL trickled in this quarter, impacting profitability. The wage hike in 3Q (MPHL's normal wage hike cycle) may be more moderate as a consequence. This has kept our estimates unchanged.
- Valuation view: Our estimates are largely unchanged post the results. MHPL has been among the few mid-tier IT companies over the last few quarters, where [1] growth visibility has been intact, and it continues to grow revenues in low-to-mid teens and [2] margin estimates have not seen a downward revision (in part due to the already low base). It has amongst the best cash generation (In the top quartile of Midcap IT) and RoE in excess of 20%. We estimate CC revenue CAGR of 12.5% and EPS CAGR of 13% over FY19-21. Our price target of INR1,120 discounts forward earnings by 15x, implying an upside of 20%. Hence, we upgrade our rating to Buy.
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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