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Stock Tales are concise, holistic stock reports across wider spectrum of sectors. Updates will not be periodical but based on significant events or change in price.

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TALES

September 16, 2019

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September 16, 2019

CMP: | 990 Target: | 1100 (11%) Target Period: 12 months

Mphasis Ltd (MPHLIM)

HOLD

Accelerating direct core a key positive…

Incorporated in 1998, Mphasis is an IT services company with a presence in

banking & capital markets insurance, information technology,

communication & entertainment and emerging industries. Healthy TCV win

in direct channel and successful strategic partnership with DXC helped

Mphasis achieve revenue growth at a CAGR of 11.1% and 24.2% in

respective business in FY17-19. Going forward, citing its vision for 2020 and

beyond, the management indicated its focus on: 1) accelerating direct core,

2) continuous transformation in partnership with DXC/HP, 3) building

investment capability (through recruiting talent in next gen technologies,

acquisitions, Next labs), 4) strong cash flow generation and optimal cash

strategy along with 5) continued effort on margin optimisation to fuel

growth.

Three pillar strategy positive for growth

In line with historical trends, the management alluded to the fact that direct

growth would be driven by three pillars of wining more deals, higher focus

on new gen technologies and being proactive in wining deals upstream. To

this end, the company has won a TCV of US$616 million of which ~US$483

million (or ~80%) is in new generation services, which is positive for long

term revenue and margin perspective. This coupled with new client

acquisition (grew 105.3% YoY in Q1FY20) and traction in Blackstone

portfolio is expected to drive the company’s revenue growth. Hence, we

expect rupee revenue CAGR of 12% in Direct International for FY19-21E.

EBIT margin to improve in coming years

Mphasis reported an EBIT margin of 15.5% in the recent concluded quarter

(Q1FY20). The management mentioned its continuous focus on margin

optimisation and guided for EBIT margin of 15-17% for FY20E. We expect

the same to expand to 16.2% in FY21E, taking into consideration, ~80% of

the new TCV in new generation services, pyramid optimisation and

operational efficiency

Valuation & Outlook

The management outlook on above industry growth rate in direct core and

in line growth in DXC/HP channel indicates healthy revenue visibility. In

addition, a healthy client base, strong TCV (29.9% CAGR in FY17-19) and

strong growth in digital/next gen (36% CAGR in FY17-19) provide further

proof points. Accordingly, we estimate rupee revenue CAGR of 11.7%

(FY19-21E) and EBIT margin of 16.2% in FY21E. However, most positives

are already factored in the valuation. Hence, we assign a HOLD rating to the

stock. We value Mphasis at 16x P/E on an estimated EPS of ~| 69.1/share

(FY21E) with a target price of | 1100. Key risk to the company is high

exposure to BFSI segment where IT spending is under pressure.

Key Financial Summary s

(| Crore) FY16 FY17 FY18 FY19 FY20E FY21E CAGR (FY19-21E)

Net Sales 6,080.8 6,076.4 6,545.8 7,731.0 8,733.1 9,639.7 11.7%

EBITDA 898.7 968.8 1,062.4 1,323.8 1,615.6 1,821.9 17.3%

EBITDA Margins (%) 14.8 15.9 16.2 17.1 18.5 18.9

Net Profit 631.5 791.6 837.5 1,073.4 1,109.3 1,288.0 9.5%

Diluted EPS (|) 30.0 37.6 43.3 55.5 59.5 69.1

P/E (x) 33.0 26.3 22.8 17.8 16.6 14.3

RoE (%) 10.8 12.9 15.3 20.4 19.3 20.5

RoCE (%) 15.5 17.4 19.3 24.1 24.3 25.7

Source: Company, ICICI Direct Research

Particulars

Particular Amount

Market Capitalisation (| crore) 19,133

Total Debt (| crore) 543

Cash and Investments (| crore) 1,712

EV (| crore) 17,964

52 week H/L 1254 / 855

Equity Capital (| crore) 186

Face Value (|) | 10

Price Performance

Key Highlights

Strong TCV and opportunities in

Blackstone portfolio to be major

growth drivers. Hence, expect rupee

revenue CAGR of 12% in Direct

International for FY19-21E

Assign HOLD rating to stock with

target price of | 1100

Research Analyst

Devang Bhatt

[email protected]

Deepti Tayal

[email protected]

100

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Nifty (L.H.S) Price (R.H.S)

ICICI Securities | Retail Research 2

ICICI Direct Research

Stock Tales | Mphasis Ltd

Company Background

Incorporated in 1998, Mphasis is an IT services company catering to various

industries such as banking & capital markets (45% of revenue), insurance

(12%), information technology, communication & entertainment (16%) and

emerging industries (27%). From a geography perspective, America

accounts for 78% of revenue followed by EMEA (11%), India (5%) and RoW

(6%) as on June 30, 2019.

By secondary market segment, revenues are segregated mainly into direct

international and DXC/HP business forming 69% and 28.6%, respectively, of

revenues in FY19. Healthy TCV win in direct channel and successful strategic

partnership with DXC helped Mphasis achieve revenue CAGR of 11.1% and

24.2% in respective businesses in FY17-19.

Exhibit 1: Growth driven by new gen services in direct core


Exhibit 2: New gen TCV wins by tribes in FY19 ($ million)


Exhibit 3: New client wins fuel growth





Investment Rationale

Strong TCV creating good runway for growth

Focus on strategic accounts (three of the top five strategic accounts grew at

>20% YoY in FY19), new client acquisitions and inclination of deals towards

next gen areas (>80% of deals won from new gen areas in FY19) resulted

in 14.2% YoY growth in revenue in constant currency in FY19. In line with

historical trend, the management alluded to the fact that direct growth would

be driven by three pillars of wining more deals, higher focus on new gen

technologies and being proactive in wining deals upstream. To this end, the

company has won a TCV of US$616 million of which ~US$483 million (or

~80%) is in new generation services, which is positive from a long term

revenue and margin perspective. This, coupled with new client acquisition

(grew 105.3% YoY in Q1FY20) and traction in Blackstone portfolio is

expected to drive revenue growth. Hence, we expect rupee revenue CAGR

of 12% in Direct International for FY19-21E.

Exhibit 4: Direct International to be main growth driver

4458

5334

5974

6691

1000

2500

4000

5500

7000

FY18 FY19 FY20 FY21

| crore

Direct international

CAGR 12%


Exhibit 5: DXC/HP channel to support the growth

1675

2212

2411

2580

500

1100

1700

2300

2900

FY18 FY19 FY20 FY21

| crore

DXC / HP business

CAGR 8%


Potential to increase penetration in Blackstone portfolio

Blackstone (which has 52.3% shareholding in Mphasis), has 100 companies

in its portfolio with a presence in real estate, credit business and hedge

funds. Currently, Mphasis services ~10 Blackstone companies. They

contribute ~5-6% of direct core revenue. These accounts have grown 98%

in FY19. Mphasis has just penetrated 10% of Blackstone group of companies

and there is tremendous potential to scale up revenues from these channels.

Expect EBIT margins to expand to 16.2% in FY21E

Mphasis reported an EBIT margin of 15.5% in the recent concluded quarter

(Q1FY20). The management mentioned its continuous focus on margin

optimisation and guided for EBIT margin of 15-17% for FY20E. We expect

the same to expand to 16.2% in FY21E, taking into consideration, ~80% of

the new TCV in new generation services, pyramid optimisation and

operational efficiency.




Financial Summary

Exhibit 6: Profit & loss statement (| crore)

FY18 FY19 FY20E FY21E

Total Revenues 6,546 7,731 8,733 9,640

Growth (%) 7.7 18.1 13.0 10.4

Employee Benefit Expense 3,817.9 4,298.7 4,803.2 5,301.8

Other Expenses 1,665.5 2,108.5 2,314.3 2,516.0

EBITDA 1,062 1,324 1,616 1,822

Growth (%) 9.7 24.6 22.0 12.8

Depreciation 70.8 75.8 235.8 260.3

Other Income 162.1 176.7 179.2 239.0

Interest 13.0 17.4 60.0 60.0

PBT before Exceptional Items 1,140.7 1,407.3 1,499.0 1,740.6

Growth (%) 2.4 23.4 6.5 16.1

Tax 290.1 334.0 389.7 452.6

PAT before Exceptional Items 850.6 1,073.4 1,109.3 1,288.0

Exceptional items 13.1 - - -

PAT 837 1,073 1,109 1,288

Growth (%) 5.8 28.2 3.3 16.1

Diluted EPS 43.3 55.5 59.5 69.1

EPS (Growth %) 15.2 28.2 7.2 16.1


Exhibit 7: Cash flow statement (| crore)


Profit before Tax 1,141 1,407 1,499 1,741

Depreciation 71 76 236 260

(inc)/dec in Current Assets (270) (516) (244) (360)

(inc)/dec in current Liabilities 120 374 34 169

Income Taxes Paid (278) (343) (390) (453)

Others (60) (49) (114) (174)

CF from operations 723 950 1,021 1,183

Other Investments 524 371 174 234

(Purchase)/Sale of Fixed Assets (31) (81) (246) (266)

CF from investing Activities 493 289 (72) (32)

Inc / (Dec) in Equity Capital (1,103) (985) - -

Inc / (Dec) in sec.loan Funds 128 125 - -

Dividend & Divendend tax (395) (465) (626) (726)

Interest Paid on Loans (10) (16) (60) (60)

CF from Financial Activities (1,380) (1,342) (686) (786)

Net change in cash (164) (103) 264 365

Opening cash 613 464 352 616

Closing cash 464 352 616 980


Exhibit 8: Balance Sheet (| crore)


Equity 193 186 186 186

Reserves & Surplus 5,289 5,064 5,547 6,109

Networth 5,482 5,250 5,733 6,295

Total debt 390 543 543 543

Other liabilities 102 128 144 158

Source of funds 5,973 5,920 6,420 6,996

Net Block 87 120 118 113

CWIP 2 2 2 2

Intangible assets under development 95 92 104 115

Long term Loans and advances 114 71 80 88

Other non current assets 1,039 1,024 1,124 1,213

Current Investments 1,465 1,070 1,070 1,070

Goodwill 1,701 1,958 1,958 1,958

Inventories - - - -

Debtors 1,355 1,849 1,914 2,113

Cash Balance 464 352 616 980

Bank Balance 243 290 290 290

Short term Loans and advances 82 126 142 157

Other current assets 337 417 471 520

Trade payables 502 785 718 795

Other Current liabilities 485 658 743 820

Provisions 25 8 8 8

Application of funds 5,973 5,920 6,420 6,996


Exhibit 9: Key ratios


Per share data (|)

Diluted EPS 43.3 55.5 59.5 69.1

BV 283.6 271.6 307.7 337.9

DPS 20.0 27.0 28.6 33.2

Cash Per Share 36.6 33.2 48.6 68.2

Operating Ratios (%)

EBITDA Margin 16.2 17.1 18.5 18.9

PAT Margin 12.8 13.9 12.7 13.4

Debtor days 76 87 80 80

Creditor days 28 37 30 30

Return Ratios (%)

RoE 15.3 20.4 19.3 20.5

RoCE 19.3 24.1 24.3 25.7

RoIC 26.1 29.7 31.1 33.6

Valuation Ratios (x)

P/E 22.8 17.8 16.6 14.3

EV / EBITDA 16.3 13.6 11.0 9.5

Market Cap / Sales 2.9 2.5 2.2 2.0

Price to Book Value 3.5 3.6 3.2 2.9

Solvency Ratios

Debt / Equity 0.1 0.1 0.1 0.1

Debt / EBITDA 0.4 0.4 0.3 0.3

Quick Ratio 1.8 1.6 1.7 1.7





RATING RATIONALE

ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,

Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined

as the analysts' valuation for a stock

Buy: >15%

Hold: -5% to 15%;

Reduce: -15% to -5%;

Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]




ANALYST CERTIFICATION

I/We, Devang Bhatt, PGDBM, Deepti Tayal, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the

subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned

Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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