HDFC Securities report on Mphasis (1QFY19): Momentum continues. Maintain BUY
(TP Rs 1,300, CMP Rs 1,150, MCap Rs 222bn)
Mphasis posted a strong quarter (largely in-line with est) with revenue at USD 269mn, 1.7/16.4% QoQ/YoY (2.9/16.2% in CC terms). Direct Core (53.9% of rev) and HP/DXC channel (27.4% of rev) led the growth at 4.2% QoQ and 4.5% QoQ in CC terms, respectively. EBIT% came at 16.6%, -16bps QoQ (15.8% est) supported by 87bps QoQ gross margin increase (increase in FP-contract, automation). APAT stood at Rs 2.58bn supported by lower ETR.
Growth in FY18 was skewed heavily towards the HP-DXC channel (21.6% YoY vs 35% decline over FY15-17). We expect broad-based growth across Direct Core and HP-DXC ahead. Factored 14.9% CAGR over FY18-20E for HP-DXC channel based on (1) Secular growth across verticals and service-lines, (2) Strategic partnership with DXC, (3) Core system transformation projects/ cloud migration. Factored 13.5% CAGR for Direct Core supported by (1) Strong deal trends in Direct International (USD 153mn TCV in 1Q, 33% QoQ) and increase in avg. deal size, (2) High share of Digital/Newgen (44.9% of Direct Core), (3) Expansion of European footprint, (4) S&M leverage (optimisation across Direct and HP/DXC channel), and (5) Blackstone portfolio opportunity.
Factored USD rev growth at 10.1/12.3% and EBIT% at 16.7/17.9% for FY19/20E, respectively. Direct core growth est. at 3.0/3.2% CQGR and DXC growth at 2.8/2.9% CQGR for FY19-20E. Maintain BUY with TP of Rs 1,300, 20x FY20E-EPS supported by 19% EPS CAGR over FY18-20E and strong payout.