MOSL: MPHASIS (Neutral)-Tapping of new opportunities-reflected in growth, deal wins and margins

​Mphasis: Tapping of new opportunities; reflected in growth, deal wins and margins

(MPHL IN, Mkt Cap USD2.0b, CMP INR614, TP INR610, 1% Downside, Neutral)

• HP-led revenue beat: MPHL reported 4.2% QoQ revenue growth to USD231m, above our estimate of +2.0% QoQ. Growth in the HP channel jumped to 10% QoQ after three quarters of stability, reflecting expanded relationship that spans across HPE, HPI, DXC and Micro Focus, and which is not restricted to the agreement signed last year. Growth of 4% QoQ in Direct Core was driven by traction with new customers and the Blackstone portfolio.
  
• Highest-ever deal wins: Deal wins of USD183m in 1Q marked a significant jump from the average USD90m TCV struck over past year, taking LTM deal wins 40% higher YoY. New deals have been broad-based across HP, Direct Core and Blackstone, providing visibility of continued traction in focus areas. Volatility in Direct Emerging business and pressure in Digital Risk (together 16% of revenue), however, continues to weigh on its overall performance.
  
• Investments to weigh on margins: In 1Q, gross margin contracted 140bp QoQ, led by INR appreciation, lower profitability in Products and a 280bp shift onsite to 54% of revenue. Despite 40bp saving on G&A (absolute decline of 8% QoQ), EBIT margin at 13.8% contracted by 80bp (70bp miss) and was below MPHL’s target range of 14-16%. PAT at INR1,872m declined by 3.2% QoQ, a miss driven by lower margins.