All set to climb up the wall it fell from
We recently met with Mr Nitin Rakesh, CEO of Mphasis, who highlighted how Mphasis is taking giant strides to capture early-mover advantage in AI space. All along, its client-focused strategy has helped it to mine its clientele deeper along with diversifying the revenue base.
Mphasis has rallied 25% in the last three months, fuelled by expectations of interest rate cuts in US and early signs of a recovery in US-BFS. 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%/4% and target valuation to 30x Sep-26 PE (from 27x) – on better growth visibility; upgrade to ‘BUY’ with a target price of INR3,500.
Growth to rebound sharply as macro turns favourable
Mphasis has had two lacklustre years – with 7.8% growth/-6.3% decline in top line in FY23/FY24. In FY25 too, it is likely to report mere mid single-digit growth. The high interest-rate regime has hurt its two businesses – BFS (47% of revenue) and mortgage (~6% of revenue). However, US macro is now showing signs of becoming favourable for the Indian IT industry. Mphasis’s mortgage business has a perfect inverse correlation with interest rates, and should recover as sharply as it had fallen, once the Fed enters the interest rate cut territory.
Interest rate cuts are also likely to lead to a revival in tech spending by US corporates, which they had put on hold for almost two years now. The same is also corroborated by the commentary from various companies and clients – as they called out early signs of a recovery in US-BFS. Mphasis’s top client too is a BFS corporate, and recently announced historically high tech spends for CY24. A reversal of these factors – interest rates and BFS spending – shall boost growth for Mphasis ahead of peers.
Core business stays robust; trying to move early in Gen-AI domain
All along the last two years’ underperformance, Mphasis’ remaining businesses have continued to remain strong, and grown in line with peers. The company has backfilled the entire DXC channel with growth in other verticals/clients – and it now contributes only 3% to the top line (from 28% in FY19) – making it completely irrelevant. As Mphasis continues to execute its client-focused strategy, we reckon the revenue base shall further diversify over the next few years.
In our conversation with the CEO,, he highlighted how Mphasis is taking giant strides to capture the early-mover advantage in Gen-AI domain. He highlighted how Gen-AI shall change the way IT Services companies have been doing business, especially billing. Nitin is also highly excited about Mphasis’s two platforms – NeoZetaTM and NeoCruxTM – that use Gen-AI to modernise legacy codes and improve SDLC.
Upgrade to ‘BUY’ – perfect proxy for interest rate cycle
We view Mphasis as a perfect proxy for playing the interest rate cut cycle in the US along with the recovery in the BFS segment. We also forecast Mphasis shall be ahead of peers, in capturing Gen-AI driven opportunity; upgrade to ‘BUY’ (from ‘HOLD’).
Mphasis is taking giant strides to capture the early-mover advantage in Gen-AI
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