• Aditya Battu

#2 Mphasis - Mid cap, IT services

Updated: Sep 28, 2020


Why is this stock important?

  • This could very well be the next TCS of India, with impressive revenue and profit growth, maintaining healthy margins

  • Lower P/E as compared to the industry average, indicating that the stock could be undervalued and a potential opportunity

  • The company offers cloud & digital transformation services, and the shift to digital is being accelerated by the recent Covid pandemic, favoring the company

  • Impressive performance in the recent 2 quarters winning large deals, even during this time of Covid

Read on to find out more about this company...

1. COMPANY FACTS

Overview:

  • Mphasis is an IT solutions provider specializing in cloud & cognitive services, based out of Bengaluru

  • It was formed in 2000 after the merger of US-based IT consulting company Mphasis corporation (founded in 1998) and Indian IT services company BFL software limited (founded in 1992)

Type of Industry: Information Technology (IT)

Promoters: Blackstone Group Private equity firm, one of the world’s largest private equity firm, has a controlling stake of 60.5% in Mphasis


Presence: Serving customers across the globe with 71% of the revenues coming from the US and 29% from rest of the world ( Europe/UKI, APAC ) as per the latest quarter


Products/Services:

  1. Next-Gen solutions to enterprises to help accelerate digital transformation

  2. End-to-end cloud and cognitive solutions using partnership with AWS (Amazon web services)

  3. Maintenance and support for existing software products/applications

  4. Hybrid IT infrastructure management services for Hi-Tech industries

  5. Virtual “Desktop-as-a-Service” offering infrastructure and support for remote connectivity

  6. Fully managed “Employee Assistance-as-a-Service” (customer service agents) using conversational AI technologies + agent-based assistance to handle customer complaints/requests



Customer Mix: Mphasis has an extensive client base across industries which includes 6 top Global banks, 11 out of 15 top mortgage lenders and 3 top global insurance companies

  • Majorly serving Banking, Financial services & Insurance industries


  • "Emerging Industries" which the company serves includes Logistics & Transportation, Healthcare & Pharma, Manufacturing, Life Sciences, Aviation, Oil & Gas, Communications, Energy, etc.


Competitors : Most of the major direct competitors are based out of India such as home grown TCS & Infosys, with some of them located outside India





2. INDUSTRY FACTS : CLOUD SOLUTIONS & DIGITAL TRANSFORMATION


Market Size:

  • The global digital transformation market size is expected to grow from USD 469.8 billion in 2020 to USD 1009.8 billion by 2025, at a CAGR of 16.5%

  • Global cloud computing size was valued at US $266 billion in 2019 & expected to grow at a CAGR of 14.9% from 2020 to 2027

  • An IT industry survey suggests that by 2022, around 60% of the enterprises will utilize an external service provider’s cloud-managed service offering, which is twice the percentage of organizations from 2018


Market Drivers:

Market Restraints:



Major players: There are a lot of established and rising players in the digital transformation and cloud solution services providing market, but the market is huge and growing with room for high market penetration




3. STOCK INFORMATION & FINANCIAL PERFORMANCE



Valuation parameters (as on Jul 24, 2020):


Revenue: Growing at a CAGR of 9.5% from FY'16 - FY'20


EBIDTA: Growing at a CAGR of 13.8% from FY'16 - FY'20 with healthy margins of 18%-20%


PAT (Profit after tax): Growing at a CAGR of 17% from FY'16 - FY'20 with margins of about 13%


Cash flow from operating activities: Growing at a CAGR of 16% from FY'16 - FY'20


RoE (Return on Equity): Growing at an average of 2.4% from FY'16 - FY'20


Earnings per share (EPS): Growing at a CAGR of 21% from FY'16 - FY'20


Sensex vs Mphasis returns (last 5 years): Mphasis 5 year returns stand at ~170% as compared to NIFTY IT index's 51% and Sensex's 36%





4. PEER-PEER COMPARISON



Revenue & Net Profits (FY'16-FY'20): Of all the IT service companies from FY'16-FY'20 in India, Mphasis seems to have outperformed in terms of Net profit growth (17% growth YoY), along with L&T Infotech (16% growth YoY), even though the revenue growth was on the lower side


Stock performance (FY'16-FY'20): The only IT services stock which seems to have outperformed Mphasis over the last 5 years is L&T InfoTech, which is evident from its revenue growth YoY. However, with expected higher revenue growth and maintaining present margins, there seems to be a potential for upside in the coming years for Mphasis




5. FUTURE OUTLOOK


We summarize the performance of Mphasis and the outlook for the coming years below:



To conclude, this could well be a good stock to have in the portfolio for medium-long term, given the consistent performance and favorable future market dynamics



Links for references used for industry facts : 1, 2,

Link to company website : https://www.mphasis.com/

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