Let’s dive deeper into Mphasis stock analysis and its future prospects.
Mphasis Limited is an IT services company based in Bangalore, India. The company provides infrastructure technology and applications outsourcing services, as well as architecture guidance, application development and integration, and application management services.
Mphasis enables enterprises to directly address the pressing need to become fast, innovative and personalized in their response to digital disruption.
The company’s shares have 52 weeks price band of INR 1230-630 and a total market capitalization of INR 216 billion which makes it a Mid-Cap company. The shares have a P/E ratio of 18.2 and a dividend yield of 3.01%.
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars.
From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022.
The categories are as follows:
- Economic Moat
- Business Model and Management
- Growth Ratios
- Profitability Ratios
- Cash Flow Ratios
- Liquidity and Solvency Ratios
- Efficiency Ratios
- Valuation Ratios
- ROE (Du Pont Analysis)
- Future Prospects
(All units are INR Millions except ratios and per share data)
1. Economic Moat (★ ★ ★ ★ ☆)
The company operates in the IT and technology industry where market dominance is achieved through scale, clientele, technical know-how, digital infrastructure and workforce.
Mphasis serves customers across the globe including 6+ top global banks, 11+ out of 15 top mortgage lenders, and 3+ top global insurance companies. It also has about 22,000+ employees across 16+ countries.
Blackstone Private Equity, the world’s largest private equity firm acquired Hewlett Packard stake (60.5%) in Mphasis. This deal represented the largest technology investment as well as the largest acquisition by Blackstone in India.
This overall has established the company as one of the leading technology services firms in India and abroad. Therefore this category gets 4 stars in Mphasis fundamental analysis.
2. Business Model and Management (★ ★ ★ ★ ☆)
The business model of the company is such that the company has developed strong domain expertise in Banking, Financial Services and Insurance verticals.
This along with a deep relationship with marquee global customers has enabled the company to deliver growth above the industry average.
The company is also large on the innovation front and has recently won the Alconics Award under the category of ‘Best Application of Artificial Intelligence (AI) for Financial Services.
The Mphasis DeepInsights, a Cognitive Intelligence platform enables enterprises to have faster and more effective access to insights from data.
DeepInsightsTM has been developed by NEXTlabs, the research and innovation hub of Mphasis where they are working on cutting edge innovations and industry relevant solutions.
The company has overall been able to develop new technologies but still competes with other large tech companies across the world which have more resources at disposal.
Mr Davinder Singh Brar is the Chairman of the company. He started his career with Associated Cement Companies (ACC) and later joined Ranbaxy Laboratories Limited, where he rose to the position of Chief Executive Officer (CEO) and Managing Director.
Mr. Nitin Rakesh is a distinguished leader in the IT services industry and has joined Mphasis as its Chief Executive Officer and Director in January 2017.
He is the person behind the new ongoing transformation in the company. Overall the management is qualified and has shown interest in shareholders wealth. Therefore this category gets 4 stars in Mphasis fundamental analysis.
3. Growth Ratios (★★ ★ ☆ ☆)
The revenue has shown nominal growth over the last 10 years. The operating income and net income has also been almost stable over the years.
This also shows no significant improvement in the profitability of the company. The working capital is also positive and has been fluctuating. Capital expenditure has remained flat even with an increased scale. Therefore this category gets 3 stars in Mphasis fundamental analysis.
4. Profitability Ratios (★ ★ ★ ☆ ☆)
The gross margin has been declined over the years even with stable wage inflation. This indicates that the company has increased its cost of services delivered and is not able to pass it down to customers.
The other margins along with return on assets have been stable. However, the margins can decline due to the COVID-19 effects on global businesses. Therefore this category gets 3 stars in Mphasis fundamental analysis.
Also Watch This Video for Facts on Mphasis
5. Cash Flow Ratios (★ ★ ★ ★ ☆)
The net income margin has seen a slight increase over the years and with the Cap-Ex as a percentage of sales has declined. This also shows that growth is driven majorly through partnerships and acquisitions.
The free cash flow as a percentage of net income has been positive over the years. The free and operating cash flow growth has been fluctuating but this is the nature of the business.
Overall the company has shown a decent cash flow position. Therefore this category gets 4 stars in Mphasis fundamental analysis.
6. Liquidity and Solvency Ratios (★ ★ ★ ★ ☆)
The company does not have any debt in its capital structure therefore the financial leverage and debt to equity ratio has been flat over the years.
The profitability margins have also been stable over the years hence there is no significant concern to the solvency of the company.
The current and quick ratio has decreased over the years but are way above the minimum threshold which shows a good liquidity position. Therefore this category gets 4 stars in Mphasis fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ★ ☆)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
Overall the business efficiency has not improved significantly over the years and this is because of the nature of the business.
The payable period has increased from 6.34 to 50 days and the receivables days have almost declined the same due to the nature of contracts.
The cash conversion cycle has seen a steady decline from 83 days to 0 days and it can go negative. Therefore this category gets 4 stars in Mphasis fundamental analysis.
8. Valuation Ratios (★ ★ ★ ★ ☆)
The company traded at an increasing valuation since 2012 due to improving growth prospects and profitability. The company has managed to sustain the higher multiples over the years due to prudent cash generation and deployment along with expansion into new verticals.
This is also expected to continue in the near future. Therefore this category gets 3 stars in Therefore this category gets 4 stars in Mphasis fundamental analysis.
9. ROE 5 way Du Pont Analysis (★ ★ ★ ★ ★)
The leverage ratio has been increasing and the asset turnover has improved steadily over the years. The interest burden ratio has remained at 100% due to no interest-bearing debt in the capital structure of the company.
The operating margin has seen a good increase and the tax efficiency has remained stable. Overall the Return on Equity has been improving for the company even with an increased equity base. Therefore this category gets 5 stars in Mphasis fundamental analysis.
10. Future Prospects (★ ★ ★ ★ ☆)
Some insights for the coming years from the analysis, management discussions and con calls are as follows.
- The management has indicated a soft growth in revenue in the near future. However, they will be maintaining the margins by using tools such as an increase in the share of Fixed Price Projects, fresher hiring, pyramid rationalization, automation and reduced travel costs etc.
- There are no major demand reductions from clients. However, the company indicated that clients are re-prioritizing/deferring some IT spends.
- In terms of capital allocation and project budgeting, the company will maintain its around 55% payout policy. Direct Core segment has been the growth driver and has seen strong deals wins over the recent years
Overall the company will only suffer from temporary slowdown due to Covid-19 related issues and slowdown. The fundamentals still remain good for the long term outlook. Therefore this category gets 4 stars in Mphasis fundamental analysis.
The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above or equal to 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
Therefore it is a 4-star stock
★ ★ ★ ★ ☆
|Economic Moat||★ ★ ★ ★ ☆|
|Business & Management||★ ★ ★ ★ ☆|
|Growth Ratios||★ ★ ★ ☆ ☆|
|Profitability Ratios||★ ★ ★ ☆ ☆|
|Cash Flow Ratios||★ ★ ★ ★ ☆|
|Liquidity & Solvency||★ ★ ★ ★ ☆|
|Efficiency Ratios||★ ★ ★ ★ ☆|
|Valuation Ratios||★ ★ ★ ★ ☆|
|ROE (Du Pont Analysis)||★ ★ ★ ★ ★|
|Future Prospects||★ ★ ★ ★ ☆|
|Overall Fundamental Rating||★ ★ ★ ★ ☆|