MOSL: MPHASIS (Neutral)-Traction intact in Direct and HP channel

Mphasis: Traction intact in Direct and HP channel

(MPHL IN, Mkt Cap USD2.8b, CMP INR1069, TP INR1150, 8% Upside, Neutral)

• Marginal miss on margins: MPHL’s revenue grew 3% QoQ CC (our estimate: +3.4%) in 2QFY19. EBIT margin of 16.4% (-20bp QoQ) came in below our estimate of 17.2% due to pressure in Digital Risk and costs associated with ramp-up of new deals. PAT of INR2.7b (+5% QoQ) was in line with our estimate; miss on operating margins was made up for by higher other income.
• Strong growth in HP and Direct channels: Growth in 2Q at 14.8% YoY CC was strong, driven by the HP channel (+25% YoY CC) and Direct Core (+14% YoY CC). Digital Risk, however, continued exhibiting weakness, pulling Direct International growth lower (10% YoY CC). Business mix continued improving, as New-Gen Services grew 48% YoY to form 46% of Direct Core.
• Positive outlook: Continued momentum in HP and sustenance of mid-teen growth in Direct Core are expected to keep growth buoyant. Deal wins of USD210m – of which 77% was from New-Gen Services – reinforces momentum. However, the decline of mortgage volumes in the US brings in uncertainty on the outlook for Digital Risk. On profitability, MPHL maintained its EBIT margin guidance of 15-17% given: [1] Wage hikes effective 3QFY19 and [2] Fully hedged net exposures imply no gains from weak INR.