Shares of mid-cap technology company Mphasis Ltd have surged by 18% so far this fiscal year, outpacing the 7.5% rise in the sectoral Nifty IT index. This is despite its muted earnings performance over the last two quarters amid healthy deal wins.
Slower-than-expected deal ramp-ups kept sequential constant currency revenue growth flat during Q2FY24, missing analysts’ estimates. A relatively higher exposure to mortgage businesses has been the Achilles heel for Mphasis. Therefore, amid demand headwinds, analysts have cut earnings for FY24 and FY25. But management’s commentary on faster-than-expected recovery seems to have buoyed investor sentiment.
Its direct (mortgage) business declined by around 7% sequentially and now contributes 6% to revenue versus 11% last year, the management said. There are signs of a pick up in orders in the mortgage business, so the company expects stability in Q3, followed by a sequential uptick in performance in Q4. Here, the management is betting on the ramp-up of deals or better execution to drive revenue growth in the second half of FY24. But overall demand environment is still tepid and December quarter is typically weak for the sector due to furloughs. So, this anticipated revenue revival may be easier said than done.
This is the second quarter in a row that its ‘turnaround’ call has not materialized, Nirmal Bang Institutional Equities said in a report on 22 October. “Second, while the worst on the mortgage front (mostly demand) may be behind us, asset quality pressures seem to be building up on the consumer lending side for US banks, based on rising delinquencies on personal loans, credit cards and auto loans,” the report added.
What’s more, higher interest rates for longer period is likely to persist at least through 2023. This could further delay discretionary IT spending by banking and financial services (BFS) clients. Mphasis has the highest exposure to troubled BFSI (58% of revenue) among peers, said ICICI Securities. Besides, BFS excluding-mortgage has been declining for the past four quarters, it added.
For now, non-BFS business is holding fort for Mphasis. Here, the deal pipeline rose 42% year-on-year in Q2FY24. The firm is also making efforts to diversify its non-BFS portfolio. Mphasis’s latest acquisition of Silverline is expected to aid revenue growth, but gradually.
The stock’s valuation is a pain point, though. Mphasis is trading at 21 times estimated earnings for FY25, showed Bloomberg data. This is at a premium to most tier-1 IT companies.
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Updated: 24 Oct 2023, 06:41 PM IST