Why Mphasis Share Price is Falling

Editor's note: The ripple effect of crisis in the US banking sector was evidently felt in the Indian share markets too.

In the last two weeks, Indian banking stocks witnessed a broad based selloff. The ripple effect was not just restricted to the banking sector but also on IT stocks, especially for midcap companies like Coforge and Mphasis.

Mphasis has exposure to First Republic Bank of the US. Investors are worried with regards to the IT company's exposure to the US bank and whether the company will be caught in a broad based correction.

This dampened sentiment is on the back of market experts projecting that the recent developments may lead to banking clients procrastinating on IT spending decisions, given the capital constraints.

The budget cycle of calendar year 2023 may also be delayed. This would result in longer sale cycles which would impact the IT sector's near-term visibility.

Also, the banking, financial service, and insurance (BFSI) segment which contributes nearly 30-35% of the total revenue of Indian IT services sector, is expected to face the cost-cutting brunt.

For this reason, Mphasis share price is facing an indirect pressure.

However, this is not the first time Mphasis share price has come under pressure...it was already in troubled waters before the SVB collapse.

In October 2022, we wrote to you in detail explaining why Mphasis share price was falling. Shares of the company continue to reel under pressure owing to those same reasons even today.

Continue reading to know more...

Why Mphasis Share Price is Falling

Shares of Mphasis are down 4% in the last five days. The stock is also down 40% in 2022.

Why, you may wonder?

The stock has been under pressure for a while now due to a broader decline in IT stocks. The Russia-Ukraine war put global markets under pressure. This fall in global markets also triggered a fall in Indian IT stocks.

However, the company's shares have fallen recently after it reported lower than expected results for the September 2022 quarter.

How did it fare?

Let's find out...

Muted Quarterly Results

Mphasis reported a 16.8% YoY revenue growth in constant currency terms which was lower than analyst expectations. The revenue miss was due to unexpected furlough in a specific client.

However, the impact in rupee terms got adjusted on account of a depreciation in the Indian rupee with respect to the US dollar. It reported a revenue growth of 27% YoY in rupee terms.

The company's growth continued to witness adverse mortgage LOB impact from macro factors (yield volatility), affecting the BFS vertical, while the Insurance business saw a sequential decline.

Due to the increase in revenue, the company's operating profit rose 24.1% YoY. But operating profit margins remained flat at 17.5% as expenses rose.

The management has reiterated its operating profit guidance band of 15.25-17% for the rest of the financial year 2023.

Overall, the company reported net profit growth of 22.5% YoY. Net profit margins came in flat at 11.9%.

Update: For the quarter ended 31 December 2022, the IT company reported flat numbers. During Q3 of the current financial year, revenue declined by 2.8% sequentially in constant currency terms.

Its mortgage business, largely represented by digital risk, experienced significant volume ramp down in this quarter, the magnitude of which was unanticipated and unprecedented.

Rising interest rates, sluggish home sales, and consumer price inflation, dragged down company's business in the quarter ending December 2022.

Management commentary

In the latest conference call, the company's management mentioned that it sees strength, not only in deal closures but also in origination.

Mphasis signed contracts worth US$ 302 m taking the total contractual value to US$ 1.3 bn with two large deals of cumulative value of US$ 110 m.

It shared that 3 of 5 NCA (new client acquisitions) verticals have achieved a run rate of US$ 100 m over the last 3 years, and contribute 25% to the direct revenue, indicating client acquisition success.

For verticals such as Insurance, the company will work on creating a few anchor clients within each subsegments such as brokerage, and life, to scale up growth potential.

Mphasis said two-thirds of its clients believe IT services spending may increase in 2023 despite macro headwinds.

Changing deal models may influence outsourcing spends, adding that 65% of customers believe vendor consolidation is a high priority.

Update: As per the management, the conversion of total contract value into revenue realisation is slowing in the current macroeconomic environment.

Further, the management expects the mortgage business to remain muted in the last quarter of the current financial year.

It believes that the very short-term outlook of the mortgage business may remain uncertain.

How Mphasis shares have performed lately

Mphasis shares have declined by 4% in the last five days. The stock is also down 40% in 2022 due to pressure in global markets.

In 2022, Indian IT stocks experienced a sharp correction, partly due to concerns about a prolonged slowdown in US IT spending.

May 2022, in particular, proved to be a bad month for IT stocks. A growing movement of economists have already predicted a global recession within the next 12 months. The Indian market is unlikely to escape these headwinds.

The stock of Mphasis touched its 52-week high of Rs 3,495 on 16 November 2021 and a 52-week low quote of Rs 1,983 on 26 September 2022.

At the current price, Mphasis trades at a PE multiple of 29.6 and a price to book value multiple of 9.2.

About Mphasis

Mphasis is a global information technology services company that specialises in 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.

It was once a Hewlett Packard Enterprise subsidiary. However, 56% the company's stake is now held by the global private equity major Blackstone Plc.

To know more about Mphasis, check out its Mphasis factsheet and quarterly results.

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