Mphasis Ltd: Near-Term Pain; Medium-Term Growth Drivers In Place

BUY

CMP: Rs1959  

Target Price: Rs2500

* Furloughs, lesser number of working days, deferred spending, and continued weakness in mortgage (uptick in interest rates in the US) would weigh on the sequential revenue growth trajectory in Q3. Management expects Q4 growth to be better than Q3 growth.

* Exposure to the interest rate-sensitive portion of the business is in a low single-digit percentage of revenue; hence, the incremental impact will be limited. MPHL has exposure to home equity loans and Home Equity Lines of Credit (HELOC), which may come under pressure if home prices correct sharply.

* Mphasis remains confident of delivering EBITM within the guided range of 15.25-17% for FY23 (15.3% in H1FY23); however, the pace of margin expansion would be slower due to growth moderation.

* We have revised our EPS estimates by 0.1% to -2.7% for FY23E-25E, considering the revised forex assumption for H2FY23 (Rs81.5/$ vs. Rs80.25/$ earlier) and lower growth assumptions. We have rolled forward our TP to Dec-24 and lowered the target multiple to 22x (earlier 23x), factoring growth moderation. We maintain BUY with a TP of Rs2,500 at 22x Dec-24E EPS (earlier Rs2,600), considering reasonable valuation, steady wallet share gains, and expansion in addressable markets with competency build-up.