Mphasis - Growth To Recover In FY25; Valuation Remains Full: Motilal Oswal

Motilal Oswal Report

We hosted the management of Mphasis Ltd. at our flagship conference, AGIC – 2023. Through the presentation, the management touched upon the implications of Generative AI (subset of LLM) on business operations and the cannibalisation impact it may pose to the technology service lines.

Moreover, we also attended Mphasis’ analyst meet recently. The key takeaways from the meet are:

• Mphasis is driving incremental growth by doubling-down on its vertical- and horizontal-focused strategies, while constantly mining and onboarding potential clients through the new client acquisition engine.

• The company has made a few strategic investments to facilitate its deep vertical presence and participate more into the customer-centric solutions, instead of delivering commoditised services.

• Moreover, banking, financial services remains a key focused vertical and it continues to scale up through wallet share gains; while it draws attention to non-BFS units and de-risks banking heavy portfolio.  However, Mphasis’ current valuation of 22 times FY25E EPS fairly factors in the recovery in earnings growth next year.

• Reiterate 'Neutral' with a target price of Rs 2,250 (premised on 21 times FY25E EPS).

Although Mphasis Ltd.'s management indicated an early sign of recovery in mortgage business with improving revenue visibility on its banking, financial services portfolio, we maintain our 'Neutral' rating on the stock factoring in the near-term weakness in direct business.

However, the weakness will be offset by better medium-term growth due to strong deal wins.

We remain watchful of the macro recovery to see further progress in its DR business with expected volume recovery on its origination and refinance services.

We expect an FY24/FY25 USD revenue decline of 4.1%/growth of 14.8% YoY with FY24 margin at 15.5% (lower end of the guided range of 15.25%-16.25%).

We anticipate FY25E margin to improve to 16.5%. We anticipate FY25E margin to improve to 16.5%.

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