Invest In This Low-Debt Multibagger Software Stock For 14% Gain, Received High Analyst Rating

Motilal Oswal has given buy call to the stock of MphasiS Ltd (MPHL) for a strong upside of 14%. According to the brokerage, if investors buy the stock at a current market price of Rs 2278 apiece, it has the potential to give a return of 14% with a target price of Rs 2600 apiece. MPHL's direct business was soft in 1QFY23 due to slowdown in its mortgage processing business (DR) led by elevated interest rates and weakness of a few European clients.

While we expect the drag in its mortgage business to continue given the interest rate environment, the growing share of non-rate sensitive business (50%+ of DR in 1QFY23) should reduce the intensity of the impact.

1. MphasiS Ltd Stock Outlook

The current market price of the stock is Rs 2323 apiece with a gain of 2.05% till noon's trading. The 52-week high is 3659 apiece and 52-week low is Rs 2070 apiece. It is a company with low debt. It has a market capitalization of Rs 43,801 crore. The PE of the stock is 29.33. The stock has given multibagger returns with 299% returns in 5 years and 151% return in 3 years.

2. Stable Margin Performance

MPHL has delivered a stable margin performance over the last few quarters, unlike its peers that have reported material weakness on supply constraint. While the 1QFY23 EBIT margin of 15.3% was at the lower end of its guidance range of 15.25-17.0%, management has retained its guidance band and indicated upside potential due to better utilization and ramp up of fresher hiring. We see the company as one of the very few in our coverage to deliver margin improvement in FY23E to 15.8% (+40bp YoY). This should help it report a PAT growth of 19% over FY22-24E in INR terms.

3. Key Highlights From The Management

There is a higher impact of the current macro environment in Europe as deal timelines are getting stretched. However, management is not seeing any impact in current pipeline. It has added other verticals in Digital risk that will take a few quarters to scale up. Digital risk as a portion of overall business is likely to shrink. Pricing, growth leverage and pyramid underpin its FY23 margin outlook.

4. MphasiS Ltd Valuation

According to Motilal Oswal, "Impressive deal wins and continued expansion in the pipeline would drive MPHL's medium-term growth. While the overhang from the DXC business (4.7% of revenue) persists, strong traction in Direct International should continue to drive overall performance. The management's ability to defend margin is a key positive. MPHL's ability to proactively win multiple large Digital transformation deals and gain wallet share indicates strength in its sales and delivery capabilities. The stock is currently trading at ~21x FY23E EPS. We value the stock at ~24x FY24E EPS and maintain our BUY rating with a TP of INR2,600.

5. About MphasiS Ltd

Mphasis applies next-generation technology to help enterprises transform businesses globally. Customer centricity is foundational to Mphasis and is reflected in the Mphasis' Front2Back^TM Transformation approach. Front2Back^TM uses the exponential power of cloud and cognitive to provide hyper-personalized (C=X2C2TM=1) digital experience to clients and their end customers. Mphasis' Service Transformation approach helps 'shrink the core' through the application of digital technologies across legacy environments within an enterprise, enabling businesses to stay ahead in a changing world. Mphasis' core reference architectures and tools, speed and innovation with domain expertise and specialization are key to building strong relationships with marquee clients, according to its official website.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal Financial Services. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decisions.