MOSL: MPHASIS (Neutral)-Both engines feeding into strong traction

Mphasis: Both engines feeding into strong traction

(MPHL IN, Mkt Cap USD3.2b, CMP INR1150, TP INR1100, 4% Downside, Neutral)

• In-line quarter: MPHL's revenue grew 1.7% QoQ to USD269m (est. of USD268m) in 1QFY19. EBIT margin shrank 20bp QoQ to 16.6% (est. of 17.1%). However, there was a one-time gain in the previous quarter because of revenue from the India government business, excluding which the margin expanded by 40bp (in-line). PAT of INR2.5b (+3% QoQ) was below our estimate of INR2.8b due to lower other income (INR382m v/s est. of INR424m) and forex gains (INR67m v/s est. of INR350m).
• Growth in HP and Direct Channel: Growth in 1Q at 16.2% YoY CC has been strong, and contribution comes from both the HP channel (+23% QoQ CC) and Direct Core (+15% YoY CC). A reinforced relationship with the HP entities, strong traction in new-generation services (now 44% of Direct Core), and additional growth from new engines like Blackstone and Europe have been driving the traction. Deal wins of USD153m with 78% new-gen services further reinforce continuity of momentum.
• Buyback announced: MPHL approved a buyback to the tune of INR9.9b (3.8% of paid-up equity and 36% of existing cash) at a price of INR1,350 per share. Although this would be EPS-neutral in our view (lower share count offsetting reduced other income), it would improve return ratios by 2pp. While the buyback is a one-time return, we have maintained our payout expectations at ~45% of PAT, going forward.