Mphasis Limited: Long Term BUY Call by Nirali Shah, SAMCO Research

Mphasis Limited: Long Term BUY Call by Nirali Shah, SAMCO Research

Mphasis Limited has been suggested as a Long Term BUY Call by senior research analyst Nirali Shah from SAMCO Research. The stock has been recommended as a BUY on declines. Mphasis is currently trading in Rs 1275 - 1300 and this call has been recommended for long term.

Strong PE Backing - From a 52.2% stake in 2018, the Blackstone Group recently increased their stake in Mphasis to 56.21%. Covid-19 led to a market sell-off in March and this private equity wasted no time to increase their stake in Mphasis by 4.01%. The rise in stake is an indication of Blackstone's rising conviction in the company's growth which further boosts investor confidence. Also, with Blackstone's backing, Mphasis can access Blackstone's portfolio companies and accelerate its Direct core revenue growth.

Robust Pace Of New Client Acquisition - Despite the pandemic, Mphasis recorded deals amounting to $259Mn in Q1FY21 alone and has delivered a 12% CAGR in deal wins since the past 3 years. New client additions in the direct channel have also been strong and the company has added 51 new clients in the past 12 months.

A Consistent Cash Generator - The Company has an OCF/EBITDA of over 80% and has a negative cash conversion cycle which shows that its working capital isn't tied up for long and business has liquidity. With a ROE of 21%, ROCE of 26% and a dividend yield of 3%, Mphasis has strong potential to reward its shareholders as it continues on its growth path.

High Growth Cheap Valuations - Despite growing at a faster than industry rate, the company is attractively valued at a P/E of 18x which is much lower than the IT industry average of about 23.8x. The company trades at a P/B of 3.7x (IT industry average of 6.1x) which is another indicator of the stock being undervalued and offering strong growth potential going forward.

A Level Playing Field For Mphasis - Exposure to travel, tourism and energy is an issue for many mid-cap players amidst a pandemic, but Mphasis has less than 2% exposure to these sectors, making it comparatively less vulnerable. It does have a 27% revenue exposure to the DXC segment, but this concentration is diversified as DXC itself is spread across banking and insurance sectors.

Key Risks

Higher-Than-Average Leverage - The company has some debt in the form of borrowings of Rs. 571 crore resulting in a debt to equity ratio of 0.09. While this amount is small and easily manageable, the debt obligations can result in low free cashflows. Investors need to keep an eye on these levels.

Higher Employee Churn - Mphasis has a slightly higher attrition rate of 20% which would indicate that the company may have to spend more resources towards employee training which could limit its efficiency.

Competitive Risk - While the adoption of digital solutions serves as a big boost for the IT sector, this also makes the competition stiffer for players like Mphasis. Management will have to continue focusing on innovation to keep pace with the industry.