Buy Mphasis, target Rs 1,300: HDFC Securities

HDFC Securities has a buy call on Mphasis with a target price of Rs 1,300.

The current market price of Mphasis is Rs 1,154.90.

Time period given by the brokerage is one year when Mphasis price can reach the defined target.


Views of HDFC Securities on the company:
Mphasis posted a strong quarter (largely in-line with est) with revenue at USD 269mn, 1.7/16.4 per cent QoQ/YoY (2.9/16.2 per cent in CC terms).

Direct Core (53.9 per cent of rev) and HP/DXC channel (27.4 per cent of rev) led the growth at 4.2 per cent QoQ and 4.5 per cent QoQ in CC terms, respectively.

EBIT per cent came at 16.6 per cent, -16bps QoQ (15.8 per cent 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 per cent YoY vs 35 per cent decline over FY15-17).

We expect broad-based growth across Direct Core and HP-DXC ahead.

Factored 14.9 per cent 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 per cent CAGR for Direct Core supported by (1) Strong deal trends in Direct International (USD 153mn TCV in 1Q, 33 per cent QoQ) and increase in avg. deal size, (2) High share of Digital/Newgen (44.9 per cent 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 per cent and EBIT per cent at 16.7/17.9 per cent for FY19/20E, respectively.

Direct core growth est. at 3.0/3.2 per cent CQGR and DXC growth at 2.8/2.9 per cent CQGR for FY19-20E.

Maintain BUY with TP of Rs 1,300, 20x FY20E-EPS supported by 19 per cent EPS CAGR over FY18-20E and strong payout.