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For Mphasis investors, is there no light at the end of tunnel?

May 22, 2023

Investors in Mphasis Ltd remain a disappointed lot. The mid-tier IT company saw its sequential constant currency revenue decline for the third consecutive quarter in June (Q1FY24). Revenue fell by 3.3%, higher than analysts estimates. The persistently challenging situation in the mortgage segment, to which Mphasis has relatively higher exposure, has been a sore point for the company. As a result, the banking and financial services vertical, a major contributor to the company's revenue, witnessed dismal performance.

However, like many of its IT peers, Mphasis witnessed strong deal wins in Q1FY24. In fact, it achieved record deal wins amounting to $707 million, double the average run rate, according to the management. Artificial Intelligence played a significant role in securing approximately one-third of these deals. Additionally, the company won seven large deals, including five non-banking and financial services deals and four deals valued above $100 million Total Contract Value (TCV). The management remains optimistic that these wins will contribute to a sequential revenue pickup starting in Q2FY24.

While the management believes that the worst is over for the mortgages segment, some analysts remain skeptical due to potential concerns about an impending recession and further rate hikes by the US Federal Reserve.

"We do not share Mphasis’ ‘cautious optimism’ around the BFS space over the next three quarters in FY24. Firstly, we sense that the US Fed funds rate will stay high (if not go up further) for the rest of 2023. This will likely keep mortgage rates elevated," said analysts at Nirmal Bang Institutional Equities. Also, “while the worst on the mortgage front, mostly demand, may be behind us, asset quality pressures seem to be building up on consumer lending side for US banks based on rising delinquencies on credit cards and auto loans," it added.

Consequently, the domestic brokerage house suggests that the recent stock rally following Q1FY24 results may be premature.

Following the announcement of Q1FY24 earnings last week, the stock has faced pressure. On Monday, the stock fell nearly 4% in early trading, with some recovery later in the session. Over the past year, the stock has delivered marginally negative returns compared to the positive returns of the benchmark Nifty IT index.

For a meaningful stock recovery, Mphasis must witness a turnaround in revenue growth. But as things stand, expectations for such a rebound remain subdued. "Even after factoring in the expected recovery, revenue is projected to decline by 4.6% year-on-year constant currency in FY24. We believe that the current valuation of 22x FY25E earnings per share fairly factors in near-term earnings growth," said analysts at Motilal Oswal Financial Services Ltd in a report.