MPHASIS : Powered By Technology

With technologies like industrial automation, drones and robotics, cloud, IoT, augmented and virtual reality technologies, big data and analytics, artificial intelligence and blockchain being the key to driving the global digital transformation business, Mphasis is all set to chart out a trailblazing path ahead

Mphasis Limited is an information technology solutions’ provider in cloud and cognitive services. The company offers infrastructure technology, architecture guidance, applications’ outsourcing services as well as application development, integration and management services. Mphasis assists its clients in streamlining their business processes by offering customised solutions for operations and technology outsourcing. It was formed after the merger of the Indian IT services company BFL Software and US-based IT consulting company Mphasis. 

The company’s segments include banking and capital market which has asset management, corporate banking, credit card and payment, investment banking, mortgage (digital risk), retail banking, wealth management and brokerage. Its insurance segment has life, retirement, property and casualty. Its other industries consist of airlines, communications, energy and utility, healthcare, life sciences, logistics, manufacturing, and oil and gas. 

Industry Overview

India’s IT industry contributes around 7.7 per cent to GDP and is expected to constitute 10 per cent of India’s GDP by 2025. The IT industry is currently undergoing rapid evolution and is changing the shape of the Indian business environment. The IT sector includes software development, software management, consultancies, business process outsourcing and online services. The Indian IT industry has a low-cost advantage, being 5-6 times less expensive than the US. India also has one of the largest qualified talent pools of technical graduates in the world. 

In FY20 the domestic revenue of the IT industry was estimated at USD 44 billion and export revenue was estimated at USD 147 billion. It is estimated that the IT industry revenue will grow to USD 350 billion by 2025. Later, by 2025, revenue from the digital segment is expected to constitute around 38 per cent of the total industry revenue. India’s cloud market is expected to be USD 7.1 billion by 2022, majorly because of the increasing demand in big data, data analytics, Internet of Things (IoT) and artificial intelligence (AI). Indian IT companies can be seen adapting to changes in demand to take advantage of the changing scenario. 

Technologies like industrial automation, drones and robotics, cloud, IoT, augmented and virtual reality technologies, big data and analytics, AI and blockchain are the key to driving the digital transformation business and going forward will act as growth drivers for IT companies. Globally, several countries seem to be taking renewed interests in data protection and data privacy by implementing stringent compliance laws and continuously exposing domestic as well as foreign companies risking non-compliance. 

Companies in all industries plan to reduce IT spending, but those in healthcare, retail and industrial manufacturing saw the deepest cuts in the last quarter. Spending for on-premise hardware and software suffered the most, while investments in SaaS and public cloud increased. While airlines and hospitality verticals faced the largest impact of the ongoing pandemic, various sectors – including banking, life insurance, consumer products, etc. – faced lesser impact and are expected to recover much faster. These have been highlighted as green zones in the chart. Around 66 per cent of Mphasis’ revenue portfolio falls in the green zone with lesser near-term impact and faster recovery. 

Financial Overview

Looking at the quarterly trends on a consolidated basis, for Q1FY21 the company reported net sales of Rs 2,288.21 crore, an increase of 10.94 per cent, as against the net sales of Rs 2,062.56 crore for Q1FY20. For Q1FY21, the company gained an operating profit of Rs 455.48 crore, expanding by 6.34 per cent compared to the operating profit of Rs 428.33 crore gained in Q1FY20. It gained a net profit of Rs 275.12 crore in Q1FY21, rising by 3.94 per cent compared to the net profit of Rs 264.70 crore gained in Q1FY20. To some extent the quarter witnessed the impact of the pandemic as well as softness in DXC.

For Q1FY21, direct international revenue grew by around 19.8 per cent YoY and by 2.1 per cent QoQ on a reported basis while on constant currency basis it rose by 10.8 per cent YoY but declined by 0.5 per cent QoQ. As for the direct core business, revenue grew by 15.5 per cent YoY and 0.5 per cent QoQ on a reported basis while it increased by 6.9 per cent YoY but declined by 2.1 per cent QoQ on constant currency terms. DXC revenue witnessed a decline by 8.7 per cent YoY and 12.6 per cent QoQ on a reported basis and a decrease by 14.3 per cent YoY and 15.8 per cent QoQ in constant currency terms.

During Q1FY21 strong growth momentum and positive outlook was seen for the company’s banking and capital markets segment, reporting a strong quarter with around 12 per cent YoY growth. With strong positive growth in the BCM segment and digital risk it can be safely deduced that the company is one of the most preferred service providers in the banking and financial services’ industry.

On the annual front, in FY20 the company reported net sales of Rs 8,843.54 crore, an increase of 14.39 per cent over the net sales of Rs 7,730.98 crore reported in FY19. For FY20 operating profit increased by 21.84 per cent to Rs 1,828.20 crore from Rs 1,500.54 crore reported in FY19. Mphasis gained net profit of Rs 1,184.84 crore in FY20, which is an expansion by 10.39 per cent compared to the net profit of Rs 1,073.35 crore gained in FY19.

Outlook

The pandemic turned out to be a booster dose that the IT sector was in need of. Most companies and economies were seen rapidly shifting towards digitalisation. Never before has there been such a huge wave of quickly adapting to the use of digital technology. In fact, rapid adoption of new technologies and expansion of digital capabilities will continue to see further growth. Mphasis has been continuously focusing on enhancing its capabilities, one of which is blockchain. Currently the company has also started working in quantum computing by building accelerators and doing pilot programs with its customers. It believes that increasingly a large part of the economic value that is created comes from digital innovation, ecosystem proposition and new technologies.

The path forward will be built on skills such as domain and functional skills, digital skills and professional skills which the company has a comparative advantage at. Enhancing capabilities now is the necessary primary brickwork for future growth and sustainability. The company continues to prioritise growth by adding new clients as well as expanding the deal pipeline. Adding significant diversification in top clients as well as new relationships across the client pyramid puts the company in a better position.

With its focus on exploring growth opportunities, Mphasis plans to ramp up investments needed for large deals that it has signed recently. These deals have enabled the company undertake restructuring of its revenue concentration and mainly de-risking its exposure to DXC from an overall growth standpoint. Overall, for Mphasis the boost to the IT sector, acceleration in revenue and deals, better management and de-risking of its exposure to DXC and also well-thought strategic future expansion plans will act as the pivot for the company’s growth and positive outlook. Hence, we recommend BUY.