Mphasis Ltd: Mortgage Weakness To Weigh On Q2; Expect Growth To Pick Up In H2

BUY

CMP: Rs2265 

Target Price: Rs2800

We interacted with Mr. Manish Dugar, CFO, to get his perspective on the demand environment, revenue growth, and margin outlook.

* Deal win momentum, deal pipeline buildup, and client conversation remain steady. The company highlighted pockets of weakness - mortgage, deferment in spending on horizon-3 initiatives, and furloughs announced by few clients - which may weigh on near-term growth.

* Focus on proactive large deal origination, steady expansion in competencies, client mining, new logo additions, and steady increase in deal sizes and tenure led to healthy deal TCV wins and revenue conversion. The company expects Q2 growth to be better than Q1.

* Mphasis remains confident of delivering EBITM within the guided range of 15.25-17% for FY23. EBITM was 15.3% in Q1 and is expected to remain stable with an upward bias, considering better utilization, offshore shift, flattening pyramid, pricing benefits, and lower ESOP charges.

* Weakness in mortgage business and furloughs in few accounts are likely to weigh on near-term revenue growth. We retain Buy with a TP of Rs2,800 at 25x Jun'24E EPS, given continued wallet share gains and steady expansion in addressable markets with competency build-up.