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MOSL: MPHASIS (Buy)-Exceptional performance in Direct business

MPHASIS: Exceptional performance in Direct business

(MPHL IN, Mkt Cap USD6.4b, CMP INR2526, TP INR2770, 10% Upside, Buy)

 

Diminishing DXC impact a positive

• Mphasis (MPHL)'s 1QFY22 performance was led by 9.8% CC QoQ growth in the Direct business, while the DXC vertical (<10% of revenues now) declined once again (-18.1% QoQ CC). The EBIT margin remained stable (-20bp QoQ), as increased hiring was compensated by lower SG&A costs. It reported the highest ever TCV of USD505m in 1QFY22 (including USD250m announced on the 1QFY22 call).
• With the MPHL management reiterating its guidance for industry-leading growth in the Direct business, we expect the standout growth in Direct to continue (26% YoY in FY22E) - led by the acceleration of deal wins (+62% on LTM basis). We view the large deal momentum and increase in deal sizes (USD96m; 3x of FY20) at MPHL as key positives, as this should lead to better medium-term growth visibility in the business.
• This growth - despite the expected moderation in the Mortgage business (DR) - implies performance in line with midcap IT services peers such as LTI, COFORGE, and MTCL (which are trading at a 20-30% premium valuation to MPHL).
• The DXC business should continue to operate below the remaining MRC commitment over the next few months. MPHL's DXC business would post 29% CAGR decline over FY21-23E and settle at a mid-single-digit contribution by FY23E.