Mphasis: Growth to rebound in FY25; Driving incremental efforts to stimulate growth engines
We hosted Nitin Rakesh, the MD & CEO of Mphasis, at its prestigious flagship conference, AGIC 2023 Through his presentation, he 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 (MPHL)’s analyst meet recently. The key takeaways from the meet are:
However, it’s pertinent to note that Mphasis’ present valuation, with a valuation of 22x FY25E EPS, appears to adequately incorporate the anticipated rebound in earnings growth for the following year. As a result, we reiterate a Neutral stance on the stock, and our target price (TP) of Rs 2,250 is based on a multiple of 21x FY25E EPS.
Customer-centric strategy drives positive outcome
MPHL is focused on augmenting customer stickiness to have a complete ownership of the business solutions and participate in the account planning process, instead of just delivering project-based solutions through RFPs. The company believes that it has built robust account mining and scaling teams (Tribes and Squads) that participate in cross-functional activities. Further, the strong GTM strategy is augmenting these teams, and shortening the sales cycle by deeper mining and large deal origination activities. The NCA strategy is progressing very well and the company has been successful in onboarding strategic logos (potential to scale) and acquiring large deals.
BFS continues to be the key focused vertical
BFS continues to be an anchor vertical for MPHL. With matured BFS vertical, the company is exploring other emerging markets and seeking referral points through the top-10 banking accounts. BFS is a key vertical (~50%) and has driven a major part of the offshoring.
Sustained margin delivery by flexing multiple levers
MPHL’s offshore mix has witnessed a significant shift to 48% in 1QFY24 from 42% in FY20, which largely absorbed the incremental costs and delivered stable margins over the last eight quarters. Pyramid rationalisation, improvement in utilisation and growing offshoring have largely supported margin, and kept it within the guided band.
Gen AI to support and augment IT operations
On a boarder sense, the management was quite optimistic on the implications of Generative AI on executing and augmenting business activities that require cognitive and analytical capabilities. The interactive language model would replace manual operations that involve repetitive and mundane tasks such as support desk, contact center agents and iterative business operations.
Although management indicated an early sign of recovery in mortgage business with improving revenue visibility on its BFS 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.