MphasiS bets big on BFSI, digital opportunity; targets to improve margin by 400 basis points in 3 years

The stock valuation of MphasiS, a Bengaluru headquartered software exporter, has remained under pressure for quite some time given the tepid sales and profit growth over the past few years as a result of the dwindling business from its parent HP’s stable. The current trailing price-earnings (P/E) ratio of MphasiS is 12.3, which is on a lower side for a technology company with close to a billion dollars in annual revenue. Some of its smaller peers such as Hexaware, Mindtree, NIIT Technologies, and Persistent trade at P/Es in the range of 16-24.

The company has been actively focussing to reduce the dependence of revenue on the HP channel by increasing the revenue of the direct channel. According to the company’s latest investor presentation, the revenue of the direct channel grew at a three-year compounded annual growth rate (CAGR) of 21%, much faster than the industry agency Nasscom’s market CAGR of 11%.

Banking, financial services, and insurance (BFSI) is the key focus area for MphasiS. BFSI revenue rose two-fold in three years and was a major growth driver for the non-HP or direct channel revenue. Of the total deal wins worth $265 million in FY15, 33% was in BFSI.

The company plans to grow the direct channel business faster than the market growth. Nasscom has estimated FY16 dollar denominated revenue growth to be 12-14%. The company has a target of 14-16% margin at earnings before interest and tax ( EBIT).