EUR 120.00 For Business Accounts Only

MOSL: MPHASIS (Downgrade to Neutral)-DXC overhang remains, to weigh on multiples

Mphasis: DXC overhang remains, to weigh on multiples

(MPHL IN, Mkt Cap USD2.4b, CMP INR936, TP INR980, 5% Upside, Downgrade to Neutral)

 

Weak growth in key service offerings

• 3QFY20 revenue growth of Mphasis (MPHL) (4% QoQ, CC) was largely in line with estimates; however, growth within key offerings like Application Development and Maintenance (~61% of revenue) remained tepid. Growth was largely driven by low value offerings like Technical helpdesk, transaction processing and KPO. On a sequential basis, DXC revenues were almost stagnant, while for FY20, it is expected to be in the range of market growth. Medium-term uncertainty in this segment still persists.
• We downgrade our FY20-22E EPS by 5-12%, driven by (a) continued uncertainty in growth trajectory of DXC channel, and (b) adjustments to our forex gain estimates. Downgrade to Neutral. 

Operationally in-line results; Flattish revenue in DXC channel

• 3QFY20 revenue/EBIT/PAT at USD318m/INR3,694m/INR2,937m grew 12%/19%/6% YoY (v/s est. 11%/20%/11%).
• Revenue in CC terms grew 4.0% QoQ (v/s est. ~3.0%). Growth was driven by Direct International (5% QoQ, CC) while DXC revenues remained largely stagnant (0.1% QoQ, CC).
• Mphasis’ largest vertical, BFS, grew 5% QoQ, while Insurance was up ~6% QoQ. ICT and Emerging Industries grew 3% and 9% QoQ, respectively.
• Both the key geographies – the Americas/Europe reported good QoQ growth of ~3%/20%. Even non-core geographies like ROW made a healthy contribution to growth (~16% QoQ, USD).