Mindtree vs Mphasis: Which IT Stock is Better?

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Mindtree vs Mphasis: Which IT Stock is Better?

Mar 19, 2022

This pandemic has not only redefined our way of thinking but also our way of living.

Social distancing compelled companies to digitise and automate their processes and services, much ahead of time.

Every line of business, be it retail, BFSI (banking, financial services, and insurance), healthcare or transportation has to digitise its core with the help of modern technology.

Digitisation, an inevitable and perhaps a far better way to secure our future, not only boosts customer satisfaction but also enhances efficiency, effectively lowering costs.

As this technological evolution advances, established IT (Information Technology) companies stand to benefit the most. This puts India, which is at the helm of IT, in a sweet spot.

In this article, we compare two Indian IT firms that are riding this digitisation trend - Mphasis and Mindtree.

Background

Mindtree

A Larsen and Toubro group company now, Mindtree was created in 1999 by ten industry professionals from Cambridge Technology Partners, Lucent Technologies, and Wipro.

It offers product engineering services, application development and maintenance, and business process management (BPOs).

The company has 42 offices across 24 countries servicing BFSI, retail, consumer products, and manufacturing sectors.

Mphasis

A global information technology services company, Mphasis also specialises in similar fields of application development and maintenance services, along with infrastructure outsourcing services, and business process outsourcing (BPOs) solutions.

The company's core servicing sectors include BFSI, technology and media, and logistics and transportation.

Once a Hewlett Packard Enterprise subsidiary, the company's 56% stakeholders are now the famed global private equity major Blackstone Plc.

Revenue growth

An important indicator, past revenue growth can help you analyse the potential of a business.

Despite being bigger than Mindtree, Mphasis's growth in revenue has been on the higher side over the last five years. Even the 3-year-CAGR for Mphasis stands at 14.3%, higher than Mindtree's which stands at 13.1%.

Mindtree vs Mphasis Revenue Growth (2016-2020)

  2016 2017 2018 2019 2020 2021
Revenue (Rs m)            
Mindtree 47,569 52,364 54,628 70,215 77,643 79,678
Mphasis 60,807 60,764 65,458 78,194 88,435 97,223
Growth YoY%            
Mindtree   10.10% 4.30% 28.50% 10.60% 2.60%
Mphasis   -0.10% 7.70% 19.50% 13.10% 9.90%
Source: Equitymaster

Apart from forging innovations in-house, Mindtree has been investing in pertinent partnerships.

Leveraging strong collaborations with the tech leaders like Amazon, Adobe, SAP, Microsoft, Google, etc, the company has developed a strong competitive advantage.

Apart from the existing business, Mindtree is constantly scanning the market for new opportunities. The company has identified two fields that will be the centre for further growth - the Internet of Things (IoT) and cybersecurity.

Mphasis's revenue growth also comes from strong partnerships with the tech giants of the world: Amazon, Google, Microsoft, Salesforce, etc.

A large part of the revenue comes from the adoption of newer technologies in the BFSI (63.7%) and other verticals serviced by Mphasis. Unlike Mindtree, Mphasis has not shown interest in venturing into the burgeoning IoT market.

Mindtree vs Mphasis Revenue Mix by Industry (2021)

Mphasis   Mindtree  
BFSI 63.70% BFSI 20%
Technology and media 12.90% Retail consumer products and manufacturing 21%
Logistics and transportation 12.60% Communication and media entertainment 50%
Others 10.50% Travel and hospitality 9%
Data Source: Company Annual Reports

A well-diversified revenue stream is of utmost importance. So for some reason, if a company loses a client or business in a particular segment or region, the impact on the business will be minimal.

While Mindtree and Mphasis, both enjoy an impressive client roster their level of client concentration, the percentage of revenue that comes from a single client, varies.

For Mindtree, its top client accounts for 28% of the total revenue whereas the top 2 clients account for 33% of the revenue.

For Mphasis, the top client brings in 13% of the total revenue while the top 5 clients bring in 43% of the revenue. This simply implies that Mphasis has a more diversified clientele compared to Mindtree.

However, unlike Mindtree, Mphasis' segment revenues are not that well-diversified. It's largely dependent on one segment, the BFSI for 64% of its total revenue, whereas Mindtree boasts a far more diversified source of income.

Mindtree vs Mphasis Revenue Break-up - Regional

Mindtree   Mphasis  
North America 77% Americas 81%
UK and Ireland 9% EMEA (Europe, Middle East, and Africa) 11%
Continental Europe 7% India 5%
Asia pacific and Middle East 8% ROW 3%
Data Source: Company Annual Report

Profitability

A company's profitability is best reflected in its operating margin, which is the operating profit (earnings before interest depreciation tax - EBIDTA) divided by the total earnings.

Simply put, it measures the level of profit a company makes on one rupee of sales from its core operations (before interest and depreciation).

A higher operating margin centres around two crucial factors - the company is generating higher revenues or it's keeping a tight lid on costs.

Mindtree vs Mphasis Profit Margins (2017-2021)

  2017 2018 2019 2020 2021
Operating Profit (%)          
Mindtree 13.5% 13.6% 15.2% 13.9% 20.8%
Mphasis 15.7% 16% 16.9% 18.7% 18.5%
Source: Equitymaster

Barring the one-time effect of the pandemic, Mphasis's operating margins have been consistently higher and growing well compared to Mindtree's.

Employee Profile

The biggest cost head for an IT company is its manpower. The people who create and manage the software and consulting services.

Therefore, a good way to judge a company's profitability is to analyze how much revenue an employee generates. The higher the number, the better it is.

Mindtree vs Mphasis Revenue Per Employee (2017-2020)

  2017 2018 2019 2020 2021
Revenue per employee (in m)          
Mindtree 3,179,356 3,082,322 3,475,302 3,530,672 3,346,128
Mphasis 2,762,753 2,943,388 3,193,547 3,350,064 3,298,714
Data Source: Company Annual Report

While Mphasis's current revenue per employee is not much different than Mindtree's, it has been advancing, explaining the growth in margins.

Dividend

Dividend yield measures the additional income an investor can make, other than the appreciation in the value of the share. The higher the ratio, the better the return for the shareholders.

Most mature IT companies generate a lot of cash as the capital expenditure to grow is minimal. And so, they tend to be dividend paymasters.

Mindtree vs Mphasis Dividend Yield (2017-2020)

  2017 2018 2019 2020 2021 5Yr Average
Dividend Yield%            
Mindtree 1.7% 1.7% 3.4% 1.5% 1.8% 2%
Mphasis 3.2% 2.7% 2.6% 4.3% 5.3% 3.6%
Source: Equitymaster

The five-year average dividend yield is not very different for both companies with Mphasis's being slightly higher at 3.6% compared to Mindtree's at 2.0%. However, both are much higher than the current industry average of 1.47%.

Return on Equity (RoE)

Return on equity is one of the most meaningful indicators of a company's profitability and efficiency.

An excellent tool for analyzing the returns of a company, it tells you the amount of money a company can generate on the shareholder capital invested (shareholders equity).

Mindtree vs Mphasis Return on Equity (2017-2021)

  2017 2018 2019 2020 2021
Return on equity          
Mindtree 16.3% 20.9% 22.9% 20.0% 25.8%
Mphasis 12.9% 15.4% 20.6% 20.5% 18.8%
Source: Equitymaster

The 5-year average for Mphasis stands at 17.6%, which is lower than Mindtree's which stands at 21.2%.

A higher number indicates that Mindtree is generating more returns by employing its capital efficiently. However, the number for Mphasis seems to be improving, propelled by the company's rising net profit margin.

Valuation

The most common and effective ratio for comparative analysis and valuation is the price to earnings (PE) ratio. The PE ratio uses the company's earnings to find the value a shareholder is willing to pay for one rupee of earnings.

The PE ratio for Mindtree currently stands at 43.4. This is much higher than its 15-year average of 18.3 and the current industry PE of 33.6. This indicates the stock is overvalued.

The PE ratio for Mphasis is 42.9, which is much higher than its 15-year average of 15.4. This indicates the stock is overvalued.

Impact of Covid-19 on business

As the pandemic ravaged the global economy and stupefied the markets, Mphasis and Mindtree felt the heat as well.

Being in a war room of sorts, not only did it hamper the revenue growth, but it also hit their profit margins.

But as work environment safety and enabling work from home became an incessant concern, both companies had to absorb a steep rise in unanticipated costs.

There have been key infrastructure enhancements like adequate sanitization stations, minimal contact with bare surfaces, thermal scanning to maintain social distancing.

To add injury to insult, the companies had to endure termination and postponement of projects. But what followed was a blessing in disguise for the IT sector.

As digitization became the necessity of the hour, it galvanized the demand for tech services, expanding the IT business. This impact trickled down to both, Mindtree and Mphasis. The companies reported higher order bookings in the coming quarters, culminating in enhanced profits.

Bright Prospects

The pandemic accelerated the switch to digitisation. From Zoom calls to e-consultations with health experts, there has been a massive haul to technology. Companies want to adapt and digitise their core faster than before to survive and thrive in this emerging new economic order.

The seamless technological transformation will propel technology spending to astronomical highs.

Driving up data usage will trigger a strong demand for data storage and protection. Eventually resulting in increased investments in digital, analytics, cloud, internet of things (IoT), cybersecurity, and other emerging technologies. These services are expected to grow exponentially. Cloud services alone are expected to become a US$ 300 bn market.

Considering India has developed into an IT hub over the past decade, this can be a great opportunity for established players, like Mindtree and Mphasis.

Mindtree or Mphasis: Which is better?

With a strong outlook and solid fundamentals in place, the long-term view for both, Mindtree and Mphasis seem bright.

While both the companies registered steady revenue growth, Mphasis has expanded its profit margins. However, unlike Mindtree it needs to diversify their revenue source.

But when it comes to return on equity, Mindtree has been reporting higher numbers than Mphasis, offering investors more bang for their buck.

From a valuation perspective, the shares of both companies are trading at similar levels but a premium to their industry PE of 33.6.

Still wondering which is better?

Use our feature-rich comparison tool, which draws a detailed comparison between any two companies.

This tool also includes a graphical analysis making it easy for you to see trends!

You can also compare companies with their peers.

Mphasis vs Wipro

Mindtree vs Tata Elxsi

For a more detailed analysis of the mentioned IT, check out the Mindtree factsheet and Mphasis factsheet.

You can also check out the latest quarterly result for Mindtree and Mphasis.

Since stocks from the IT sector interest you, check out Equitymaster's powerful Indian stock screener tool to find the top IT companies in India.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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