This Midcap IT Stock Grew 170.61% In 5 Years, Stock Set To Rally, Brokerage Assigns Buy Rating

Lading brokerage firm Bonanza Research has assigned "buy" rating to Mphasis Limited (Mphasis) with a target price of Rs 2,420 per share to the stock. According to the brokerage's given target price, it could give gains uo 22%. Mphasis is a midcap IT sector company having a market cap of Rs 37,423.84 crore.

According to the brokerage, Before the breakout of the Covid-19 pandemic, Mphasis had underperformed its IT midcap peers by a margin because of volatility in DXC revenue stream. However, with Covid-19 breakout, there have been some changes in how business were operating. Almost all the midcap companies have had an area, which had been struggling to perform (for IT midcaps like COFORGE, LTI, LTTS and CYL).

Stock Outlook & Returns

The stock of Mphasis last traded at Rs 1,989.15/share on NSE, gained 1.52% as compared to its previous close. The stock recorded its 52 week high on 3 January 2022 at Rs 3,4797.40 and the 52 week low recorded on 19 December 2022 at Rs 1,896.05, respectively.
The stock in the past 1 week has moved up by 1.37%. In the past 1 month it moved up by 3.39%, and in the past 3 months, it moved down by 3.38%, respectively. In the past 1 year, the stock has given 37.23% negative returns. Over the past 3 years, it gave a 128.61% multibagger return and in the past 5 years, it gave 170.63% multibagger returns.

Blackstone opportunity

Mphasis is a preferred IT-services vendor, within Blackstone portfolio of companies, the advantage Mphasis has over its peers is that it has the first mover advantage to connect with the CXOs. The portfolio of Blackstone companies - not all are in the Fortune 1,000 list or a particular sector - this indicates that a large chunk of the companies in the portfolio would not have mature IT outsourcing practices, which is a great opportunity for Mphasis, in our view. Mphasis believes the addressable opportunity size from Blackstone portfolio companies is US$ 1.5bn, c.0.9x of Mphasis' revenue. We believe Blackstone portfolio companies should continue to help Mphasis accelerate its Direct Core revenue growth.

Scalable business model

Mphasis' business model has been working towards on (1) healthy growth in scalable accounts through wallet share gains, which is a difficult task given similar offerings from peers and large outsourcing practices within the clients and (2) diversifying towards new verticals (hi-tech, retail etc.), new client acquisition and different geographies. Scalability is clearly visible from the increase in number of large client buckets - US$100mn clients moved up to four from one and US$50mn clients to seven from two over past years.

Acquired by Blackstone

After being acquired by Blackstone, shareholder payouts (dividend + Buybacks) have increased significantly. Blackstone had acquired 60% stake in Mphasis from HP Enterprises in FY17. It had sold 8% in market around May'18 to enable liquidity in the stock. During the correction (on account of Covid), Blackstone increased its stake by 4% between 17-20th Mar'20 and its current stake now stands at 55.7%. Mphasis' dividend payout ratio over the last five years is 65%. We expect this to continue in the near term future with FY23/24 at 50%+, which gives a healthy dividend yield of 2.8%. Mphasis also did buyback of Rs 11bn in FY18 and Rs 9.5bn in FY19.

Initiate Coverage with Buy - TP of Rs 2,420

The brokerage said, "We believe business fundamentals are healthy, long-term growth intact and near-tern headwinds, are likely be transitory in nature. Mphasis has consistently gained market share from its peers. We initiate coverage with a BUY valuing the stock at 21x (on account of an extremely strong Direct business unit and go-to-market strategy) Dec'24E EPS of Rs 115.3 to arrive at a Target Price of Rs 2,420 with a potential upside of 24%."

Disclaimer

The stock has been picked from the brokerage report of Bonanza Research. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.