Sep’17 Results: Strong growth across core businesses, Robust deal TCV won $123; Maintain preferred pick
Mphasis delivered strong Q2FY18 results with a 4.5% qoq growth in revenues at Rs16.1bn ahead of our estimates of Rs15.5bn.
Growth was led by sustained traction in the HP-DXC business (6.6% qoq – 17.7% yoy) while Direct core revenues grew by 5.2% qoq. Strong new deal win momentum continued as it signed TCV of US$ 123mn up 48% (H1FY18 deal win growth of about 71%), indicating strong traction as evident from robust client addition of 3/2 in Direct/HP-DXC business respectively.
Digital Risk revenues grew 6% for the quarter, which is first quarterly growth after sixth straight quarter revenue decline. The growth is welcome surprise and commentary on potential recovery in this business would lead to positive upgrades. We have factored in negative/flat revenues in FY18/19E respectively.
Operating margins improved by 64bps qoq at 14.4% on improved utilization and better pricing realizations in onsite delivery. We would look forward on further clarity on long term profitability of the business in the concall. Management has earlier suggested EBIT margins band of 14-16%.
Reported PAT grew by 5.6% qoq at Rs2bn well ahead of our estimate of Rs1.9bn.
In nutshell we believe results are strong both on growth as well as deal won basis and may lead to some earnings upgrades. We currently have an ACCUMULATE rating on the stock with a TP of Rs 725 (valued at 13x FY20E earnings) and may review our estimates post the management commentary in the earnings call at 11.00am (dial in no: +91 22 3938 1095).
Other highlights
- Onsite pricing improved by 1-2% in the quarter
- Utilisation improved by about 200bps/100bps in Apps/ITO business segments
- DSO: 69days down by 1 day qoq.
- Headcount: 22,156 increased up by 259 people sequentially.
- Deal TCV won US$123mn (72% of it in area of Digital, NextGen and GRC services).
- Added 2 clients in HP-DXC channel in the quarter and 3 client added in Direct channel.
Mphasis’s Sep’17 quarter result summary:
|
In Rs mn
|
Q2FY18A
|
Q1FY18
|
QoQ (%)
|
Q2FY17
|
YoY(%)
|
Q2FY18E
|
|
Net sales
|
16046
|
15360
|
4.5
|
15176
|
5.7
|
15,519
|
|
Operating expenses
|
13,554
|
13,246
|
12,853
|
13,323
|
||
|
EBIT
|
2,312
|
2,114
|
9.4
|
2,323
|
-0.5
|
2,196
|
|
Margins (%)
|
14.4
|
13.8
|
64
|
15.3
|
14.2
|
|
|
Interest Paid
|
37
|
21
|
46
|
15
|
||
|
Other income
|
376
|
469
|
711
|
400
|
||
|
Pre-tax profit
|
2,650
|
2,562
|
2,988
|
2,581
|
||
|
Tax provided
|
673
|
690
|
822
|
705
|
||
|
Profit after tax
|
1,977
|
1,872
|
5.6
|
2,048
|
-3.5
|
1876
|
|
Minority Interest/Exceptional
|
0
|
0
|
-59
|
0
|
||
|
Emkay Net profit
|
1,977
|
1,872
|
5.6
|
2,107
|
-6.2
|
1,876
|
|
EPS (Rs)
|
10.2
|
9.1
|
|
10.0
|
|
9.7
|
Source: Company, Emkay Research.