Here's why Nuvama thinks Mphasis will benefit most from Fed rate cut

Nuvama bets on Mphasis: Information technology (IT) solutions company Mphasis is set to outperform its peers, according to domestic brokerage Nuvama, which has upgraded the IT giant to a ‘Buy’ rating from ‘Hold.’ The brokerage has set a target price of Rs 3,500 per share, reflecting a potential upside of 16.3 per cent. The upgrade comes on the back of improved growth visibility for the company.

“We see Mphasis at an inflection point – where the factors that led to its underperformance over the last two years – are now likely to reverse, leading to outperformance. We are upgrading FY25E/26E EPS by 2 per cent/4 per cent and target valuation to 30x Sep-26 PE (from 27x) – on better growth visibility; upgrade to 'Buy' with a target price of Rs 3,500,” analysts at Nuvama said in a note.

 

On the bourses, Mphasis has rallied 26.7 per cent in the last three months, driven by expectations of interest rate cuts in the US and early signs of recovery in the US-BFS sector.

Financially, Mphasis reported a consolidated net profit of Rs 404 crore for the June quarter, marking a 2.1 per cent increase year-over-year and a 2.9 per cent rise sequentially (Q-o-Q). The company's revenue from operations grew 4.6 per cent annually to Rs 3,422 crore. On a quarter-on-quarter basis, revenue was up 0.2 per cent, with constant currency revenue increasing 0.1 per cent Q-o-Q and 3.1 per cent Y-o-Y.

Meanwhile, here are key reasons behind Nuvama’s upgrade:

Favourable macroeconomic conditions 
 

Mphasis has witnessed lacklustre growth in recent years, with a 7.8 per cent growth decline in FY23 and a 6.3 er cent drop in FY24. This trend, analysts believe, is expected to reverse as the macroeconomic environment becomes more favourable. 

The high interest rates that negatively impacted its BFS (47 per cent of revenue) and mortgage (~6 per cent of revenue) segments are set to change, boosting growth prospects, analysts added.

Impact of interest rate cuts

Interest rate cuts in the US are anticipated to rejuvenate tech spending by US corporates, which had been stalled for nearly two years. As Mphasis’s mortgage business is highly sensitive to interest rate changes, it is expected to recover sharply. 

Additionally, Mphasis’s major client, a BFS corporation, has announced record tech spending for CY24, further boosting growth prospects for the company.

“A reversal of these factors – interest rates and BFS spending – shall boost growth for Mphasis ahead of peers,” Nuvama said in a note.

Strong core business and Gen-AI initiatives

Despite recent underperformance, analysts noted Mphasis’s core business remains robust. The company has successfully diversified its revenue base, reducing dependency on the DXC channel, which now contributes only 3 per cent to the top line, down from 28 per cent in FY19. Mphasis is also making major strides in the Gen-AI domain, with platforms like NeoZetaTM and NeoCruxTM designed to modernise legacy systems and enhance the software development lifecycle, analysts said.