Stock in Action – MPhasis

Mphasis Share movement of the Day

Why Mphasis Share is in Buzz?

Mphasis Ltd has recently caught the attention of investors due to its notable performance. The company's share price surged by 12.47% over the last month, outpacing the BSE Information Technology index's 9.37% gain and the SENSEX's 4.52% rise. On a single day, Mphasis rose by 5.39%, reflecting strong investor sentiment.

Fundamental Analysis 

Stock Performance

Mphasis stock price hit a record high of ₹2835 on February 19, 2024, and currently trades at ₹2697.85. Over the past month, the stock has outperformed both the BSE Information Technology index and the SENSEX, showing robust growth and resilience in the market. The stock's price-to-earnings (P/E) ratio stands at 32.19, and the price-to-book (P/B) ratio is 5.13, indicating investors' optimism about its future growth prospects.
Trading Volume

On the BSE, Mphasis Ltd saw a trading volume of 3,415 shares compared to an average daily volume of 24,685 shares over the past month, suggesting heightened investor interest.

Shareholding Pattern

As of March 31, 2024, promoters hold a 55.45% stake in the company, while overseas investors and domestic institutional investors hold 14.84% and 24.41%, respectively. This diverse shareholding pattern indicates a balanced mix of confidence from both domestic and international investors.

Business Analysis

Industry Position  
Mphasis Ltd operates in the IT Consulting & Software - Mid Cap industry. The company has a strong presence and reputation in providing IT solutions and services, which is reflected in its stock performance.

Revenue and Profitability

Mphasis Ltd reported consolidated sales of ₹3476.23 crore, although its performance last quarter showed a revenue decline of 5.2% to $251.9 million. This decline was primarily driven by a 10.9% drop in revenue from its top client, Hewlett-Packard Co. (HP), which still accounts for 55% of total revenue. Despite this, revenue from non-HP customers grew by 2.8% in dollar terms, which is a positive indicator of diversification.

Operational Efficiency

The company managed to improve its operating profit margin by 50 basis points despite the revenue hit. This improvement is attributed to the increasing share of revenue from non-HP customers, showing effective cost management and operational efficiency.

Financial Analysis

Price-to-Earnings (P/E) Ratio

Mphasis Ltd has a P/E ratio of 32.19, suggesting that investors are willing to pay a higher price for its earnings due to expected future growth.

Price-to-Book (P/B) Ratio
The P/B ratio is 5.13, indicating the inherent value investors see in the company, even without growth prospects.

Market Performance
The company's stock price has surged by 12.47% over the last month and 28.97% over the past year, outperforming the BSE Information Technology index and the SENSEX.

Investment Consideration
Despite recent earnings disappointments and reliance on HP for a significant portion of its revenue, Mphasis Ltd's ability to maintain and improve margins, coupled with investor optimism, suggests a cautious yet positive outlook for potential investors. The recent decline in stock price before the earnings announcement might have already factored in the weak results, which could explain the subsequent recovery.

Mphasis Conference call highlights - May 2024

Macro Trends

1. Market characterized by duality due to high interest rates, supply chain issues, labor market dislocations, record inflation, and geopolitical uncertainties.
2. Worldwide IT spending expected to increase by 6.8% in 2024, with IT services becoming the largest segment.
3. New opportunities in modernizing legacy systems, leveraging AI, and automation for operational efficiency.

AI Adoption and Partnerships

1. Focus on AI adoption with partnerships across hyperscalers and the overall ecosystem.
2. Engaged in AI-driven projects to improve reliability, claims processing efficiency, and security platform.
3. Strategic Collaborative Agreement with AWS for Gen AI in financial services.

Business Performance

1. Revenue stability achieved in DXC, now accounting for 3% of revenues.
2. Increased share of emerging verticals such as insurance, TMT, logistics, and transportation to 52% of revenue.
3. Strong revenue growth in Canada with a 42% year-over-year increase.
4. Investments in nearshore model with a 27% increase in headcount in various regions.

Financial Metrics

1. EBIT margin stood at 14.9% impacted by Silverline acquisition costs.
2. Reported operating profit declined 1.4% year-over-year.
3. Cash flow generation at USD55 million for the quarter, 116% of net income.
4. DSO improved to 66 days, better by 3 days over the previous quarter.

Outlook for FY '25

1. Focus on integrating capabilities and capturing growth opportunities.
2. Expecting above industry growth with visible gains from tech-led strategies.
3. Operating margins expected to remain in the range of 14.6% to 16% with a focus on operational rigor.
4. Strong client mining model and tech-led offerings to drive revenue growth.

Challenges and Opportunities

1. Uncertainty in spend and sentiment due to macro factors.
2. Continued focus on in-account actions and bottom-up driving of wallet share gains.
3. Short-burst deals showing green shoots of activity, potentially driving revenue growth in the near term.

Tech Adoption in BFSI

1. Tech adoption driving redesign of operations and technology in BFSI.
2. Automation and AI-led ops transforming service lines, creating new opportunities.
3. Short-burst deals indicating potential for sustainable revenue growth in BFSI segment.

Interest Rate Scenario

1. Acceptance of higher interest rates for longer duration in the BFSI sector.
2.Equilibrium maintained with NIMs expanding despite higher deposit costs.
3. Focus on in-account actions to drive growth amidst interest rate uncertainties.

Execution and Outlook

1. Very pleased with the way they've executed over the last few months.
2. Focused on continuing to execute on a bottoms-up micro basis.
3. Cautiously optimistic despite the uncertain environment.

Conclusion 

Mphasis Ltd has shown resilience and potential for growth despite some challenges. Its strong market performance, improved operational margins, and diversified revenue streams make it an attractive option for investors. However, the dependence on HP and the recent revenue decline highlight the need for cautious optimism. Investors should consider these factors while making informed decisions about investing in Mphasis Ltd.