Acquisition, portfolio expansion to aid revenue growth for Mphasis

Near-term returns may be muted given the sharp run in stock price

The stock of India’s eighth largest software services company by market capitalisation, Mphasis, was up about 1.8 per cent in trade after it announced the acquisition of US-based firm, Blink Interactive. Mphasis acquired the company, which offers design consultancy services around User Experience (UX) user research based software product design strategy, for $94 million.

The acquisition offers twin benefits for Mphasis. It increases the total addressable market (TAM) in this segment to $24 billion by CY24 and growth rates in the upstream user research, strategy and design are at 25-30 per cent which is 4-5 times the overall IT services market growth, according to the management.

While the company had registered a revenue growth of over 40 per cent during the CY17-20 period, revenues in CY21 are expected to be in the $33-35 million range.

There is however a negative impact on the margins prior to interest and taxes of 100 basis points due to performance based retention and amortisation costs. Margins are expected to stabilise by FY23. Analysts expect synergy on the revenue front to flow from the end of FY22 with the deal turning earnings accretive from FY24.

Suyog Kulkarni of Reliance Securities says that the biggest positive for Mphasis is higher TAM opportunity and expanded relationship with large US-based technology clients. Its 65 customers include top companies such as Facebook, Amazon, T-Mobile, Microsoft, Google and Dell with little overlap among clients between Blink and Mphasis.

“Mphasis deserves multiple rerating considering the industry leading revenue growth expected over FY21-24 period of 20 per cent in the direct business segment, expanding margins and attractive dividend yield,” says Kulkarni of Reliance Securities. The brokerage has a buy recommendation with a two-year target price of Rs 3,470.

Given the current market price (Rs 3,256) and the 60 per cent run up in the stock price over the last three months, the stock factors in most of the positives. A sharp correction in the stock price could be a good buying opportunity with momentum in deal flows in the September quarter and growth guidance important triggers going ahead.