Concerns may be overdone, downside limited for Mphasis stock

While there are worries over de-growing DXC business and buzz of Blackstone's exit, deal pipeline and growth in other verticals remain strong

Shares of Bengaluru-based IT services company Mphasis are trading with marginal gains over the past 3 months, sharply lagging the Nifty IT index's 18 per cent gains during this period. While its outperformance during July-September could be a reason, concerns over Mphasis’ DXC business and the buzz around stake sale by private equity (PE) player Blackstone have kept investors on the sidelines despite the company's healthy fundamentals.

Mphasis is a subcontractor/partner for DXC Technology, a US-based IT services and solutions company that has seen pressure on its business and is undergoing restructuring. Consequently, Mphasis reported a third successive quarter of revenue contraction from DXC in the September 2020 quarter (Q2). This comes at a time when Mphasis' long-term agreement with DXC is due for renewal in September 2021.

While the concerns are justified owing to its large share in Mphasis’ revenue (16 per cent of Q2FY21 revenue), analysts believe the downside maybe limited. According to the terms of the master service agreement, DXC has agreed to a minimum revenue commitment of $300 million towards Mphasis until the renewal. Thereafter, too, it may continue to give business to Mphasis, say analysts.

“We believe subcontractors/partners have become an important part of IT services ecosystem, particular that of the onsite delivery system,” says Suyog Kulkarni, research analyst, Reliance Securities. “Additionally, Mphasis has been working with DXC’s customers for a decade (EDS relationship) which are difficult to replace immediately.” 

Further, continued traction in Mphasis’ direct business, aided by large deal wins and robust order pipeline, is seen driving future growth. “Mphasis recorded its highest-ever quarterly new business TCV (total contract value) wins worth $360 million in direct business. We believe that improving order wins in direct business will help Mphasis mitigate ongoing growth pressure within the DXC channel,” notes Equirus Securities. This, in fact, helped Mphasis report a 7 per cent revenue growth last quarter, beating expectations.

Investor interest has also been dampened as they await further clarity on reports of Blackstone’s exit. Marble II, Mphasis' largest shareholder and a unit owned by Blackstone, is said to be weighing an exit plan. Typically, investors do not like to take any decision (buy or sell) until they have a better understanding of deal contours, such as valuations and potential buyers. 

Business Standard reached out to Mphasis, which declined to comment. In May 2018, Blackstone had sold 8 per cent stake to the likes of Aberdeen, T Rowe Price, and Oppenheimer.

Lastly, the valuation, weighed down by these concerns, are also at a considerable discount to peers like Mindtree, Coforge, and L&T Infotech, making it attractive for long-term investors. “Moderating concentration of the DXC business and steady large deal wins in direct channel sets Mphasis well on a re-rating trajectory. We raise EPS estimates by 1.8 per cent, 5.6 per cent, and 6.4 per cent for FY21, FY22, and FY23,” says Centrum Broking.