- You missed Mphasis's quiet profit surge—now's the time to act.
- Revenue grew 1.5% QoQ (CC) and 9.6% YoY (CC) in the latest quarter.
- EBIT margin held steady at 15.2% while adjusted PAT fell short of estimates.
- TCV jumped 22% YoY to $428 million, signaling strong pipeline strength.
- Motilal Oswal projects ~10.8% USD revenue CAGR and 14% PAT CAGR, valuing the stock at 30x FY28E EPS (~₹3,900 target).
You missed Mphasis's quiet profit surge—now's the time to act.
Why Mphasis's Margin Stability Defies Sector Drag
Most Indian IT peers saw margin compression this quarter as offshore headcount costs rose and pricing pressure intensified. Mphasis, however, kept its EBIT margin at 15.2%, barely off the consensus 15.4%. The key driver is a higher proportion of high‑margin digital and cloud services in its direct revenue stream, which grew 1.9% QoQ in constant currency. By keeping a tighter mix of low‑margin legacy maintenance work, the company insulated its bottom line from the broader sector squeeze.
Revenue Trends: Direct vs. Ancillary Services in Constant Currency
Constant‑currency (CC) figures strip out forex volatility, letting investors see the real operational story. Mphasis's direct revenue—primarily client‑facing digital transformation projects—outpaced ancillary revenue (shared services, offshore support) this quarter. Direct revenue rose 1.9% QoQ CC and surged 9.6% YoY CC, reflecting robust demand for AI‑enabled automation and cloud migration. Ancillary revenue, while still sizable, grew slower, indicating a strategic shift toward higher‑value contracts.
Competitor Landscape: Tata, Infosys, and the Race for TCV Growth
TCV (Total Contract Value) is the contract pipeline’s dollar value and a leading indicator of future top‑line strength. Mphasis posted a 22% YoY TCV lift to $428 million, outpacing the industry average of roughly 15% reported by Tata Consultancy Services and Infosys in the same period. While Tata leveraged its scale in BFSI (banking, financial services, insurance) to win large‑ticket deals, Mphasis’s niche focus on fintech and cloud‑native platforms gave it an edge in mid‑market digital contracts, a segment that is growing faster than the traditional enterprise segment.
Historical Echoes: What 2020–2022 Tells Us About Current Valuation
Looking back, Mphasis experienced a similar revenue‑margin dynamic in FY21‑22 when it pivoted toward cloud services. At that time, the stock rallied 45% after the company announced a 20% YoY TCV increase and a margin rebound to 14.8%. The rally was later tempered by a macro‑wide IT slowdown, but the firm’s FY24 earnings later recovered, delivering a compound annual growth rate (CAGR) of 12% for revenue over the next three years. History suggests that a strong pipeline combined with disciplined cost control can sustain multi‑year upside, even if quarterly profit beats are modest.
Valuation Mechanics: 30x FY28E EPS and What It Means for You
Motilal Oswal’s model applies a forward price‑to‑earnings (P/E) multiple of 30× to FY28 estimated earnings per share (EPS). This multiple is higher than the sector average of 24×, reflecting confidence in Mphasis’s growth trajectory and margin resilience. A 30× multiple translates to a target price of ₹3,900, implying a upside of roughly 18% from the current market price (≈₹3,300). For investors, the valuation hinges on two assumptions: (1) the company sustains a 10.8% USD revenue CAGR and (2) PAT (profit after tax) accelerates to a 14% CAGR, driven by scaling digital contracts and modest SG&A (selling, general & administrative) inflation.
Investor Playbook: Bull vs. Bear Cases
Bull Case
- TCV growth continues above 20% YoY, feeding revenue at a ~11% CAGR.
- Margin expansion to 16%+ as digital services win higher pricing power.
- Successful execution of cost‑optimization initiatives reduces SG&A expense ratio.
- Share price re‑rates toward 32×‑35× FY28E earnings as the market rewards consistent pipeline strength.
Bear Case
- Global macro headwinds (e.g., recession risk, slower IT spend) curb new contract wins.
- Labor‑law changes increase payroll costs beyond the one‑time INR 355 million impact already disclosed.
- Margin pressure intensifies if price erosion hits digital services, pulling EBIT margin below 14%.
- Valuation compresses to sector‑average 24×, pulling the target price below ₹3,300.
In short, the upside hinges on sustaining TCV momentum and protecting margins, while the downside is tied to macro‑driven spend cuts and cost inflation. Align your position size with your conviction on these two levers.