MphasiS: The classic turnaround story of a once struggling company

MphasiS has been a steady performer on the operational front from the last two years.

Takeover by the US-based private equity firm Blackstone and a sharp turnaround in HP/DXC channel, which constitutes nearly 30 per cent of its business, have changed the fortunes of the midcap IT company MphasiS, and how!

The Bengaluru-based IT services firm got a new lease of life when Blackstone acquired a controlling 60.5 per cent stake in the company from Hewlett-Packard Enterprise (HPE) in September 2016. That apart, a sharp U-turn in the company's HP/DXC segment, which was declining 15-20 per cent every year till two years ago, proved to be a boon. (HP/DXC is a common entity/ segment which emerged after HP merged with another company CSE, which is now called DXC.)

The turnaround is reflected in MphasiS' stock price, which has nearly doubled (up 93.5 per cent) from Rs 500 on November 11, 2016 to Rs 968 as of November 12, 2018. The stock outperformed most of its peers in the IT segment and the S&P BSE Sensex and moved up 30 per cent during this period. Prior to this, MphasiS had remained subdued for six years, declining 14 per cent from Rs 581 apiece in November 2010 to Rs 500 in November 2016. IT stocks during this period have gained up to nearly 5,000 per cent. 

OPERATIONAL PARAMETERS

MphasiS has been a steady performer on the operational front since the last two years. Though the compounded (CAGR) growth in sales and net profit came in at 1.26 per cent and 0.97 per cent respectively, Ebidta (Earnings before interest, tax, depreciation and amortisation) margins have moved up to 28 per cent, as compared to an average 23.83 per cent between 2010 - 2016.

Though it reported a modest disappointment on US dollar revenues in the July - September 2018 quarter (Q2FY19), new-deal TCV (total contract value) of $210 million in Q2FY19 — the highest ever in Direct International Segment (DIS) – was encouraging, analysts say.

Going ahead, analysts expect the company to continue on the growth path, led by HP/DXC business segment and Blackstone portfolio opportunity. 

Ashish Chopra, an IT analyst at Motilal Oswal Financial Services, explains, there are a lot of opportunities within the Blackstone portfolio companies. "Blackstone themselves have a lot of portfolio companies which are getting introduced to Mphasis and, which are beginning to buy IT services from Mphasis compared to their earlier vendors. So, that’s the low-hanging fruit of growth that they currently have."

On the flip side, Chopra mentions there do exist the risks to the continuity of the growth, especially from DXC channel, which will get sorted going ahead.

Other key segment that is expected to help the company deliver is BFSI (Banking, Financial services and Insurance) channel. The proportion of company’s financial services are significantly higher than most of its peers. So, nearly 57-58 per cent revenue would come from the channel, says Apurva Prasad, IT analyst at HDFC Securities.

Prabhudas Lilladher cautions that though Mphasis could fall behind other midcap peers on US dollar revenue growth for FY19, this should not be seen as a major concern from a medium-to-long term perspective. 

“We model Mphasis’ EBIT margin at 15.9/16.4 per cent for FY19/FY20E (vs 15.1 per cent in FY18). Our EPS (earnings per share) estimates are modestly trimmed by 3.5/2//3 per cent to Rs 54/64/71.5/share for FY19/FY20E/FY21E, led by margin downgrade. Mphasis trades at 16.5x FY20 EPS," it said. The brokerage has lowered target price by 3 per cent to Rs 1,220 per share (18x Sep 20E EPS vs 18x earlier).