Mphasis Q1 Results Review - Growth Recovery Already Factored Into Valuation: Motilal Oswal
Margins to remain within the guided range; maintain Neutral.
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Motilal Oswal Report
Mphasis Ltd.’s Q1 FY24 revenue performance (-3.5% QoQ constant currency) was weaker than our estimate (-1.2% QoQ CC) on account of persistent headwinds in the direct business (including mortgage) and the ongoing moderation in the DXC vertical (- 10.5% QoQ CC).
But the company delivered record deal closures in Q1 at $707 million (twice of average run rate).
Despite a weak revenue performance in Q1, the management is confident that growth will rebound in Q2 FY24, driven by the bottoming out of its mortgage processing business (Digital Risk) in Q1 and scale-up of large deals as clients resume spending.
With the interest rate hike cycle coming to an end, Mphasis is seeing early signs of revival in DR amid a pickup in volumes and capacity commitments. Additionally, the management indicated improvement in revenue conversion, which was impacted by slow decisionmaking and cuts in discretionary spends over the last few quarters.
We believe that although the commentary was good, it was not a positive surprise as it was in line with our expectation. Given the Q1 miss, we trim our FY24/FY25 U.S. dollar revenue growth estimates by 2.4%/2.1% YoY.
Despite a strong pickup expected in FY25, revenue is expected to clock a muted 4.9% compound annual growth rate over FY23-25 due to a 4.6% YoY CC decline in FY24E.
The Q1 margin performance (inline) was positive given the steep revenue decline. The management has demonstrated its ability to maintain margins in a tight range.
We see FY24 margins at 15.5% (lower end of the guided rage of 15.25%-16.25%) before improving to 16.5% in FY25. This should result in Indian rupee profit after tax growth of 11.4% over FY23-25E.
We lower our FY24-25 earnings per share estimates by ~2% each on account of a Q1 FY24 miss. We believe that the current valuation of 22 times FY25E EPS fairly factors in near-term earnings growth. Our target price of Rs 2,250 implies 21 times FY25E EPS.
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