HDFC Sec trims target price on Mphasis, stays cautious amid AI disruption

Analysts noted that AI-led deflationary pressure is becoming visible in Mphasis' contract renewals, with discounts nearly doubling from 10 per cent to approximately 20 per cent

HDFC Securities has cut its target price on Mphasis to ₹2,660 per share from ₹3,430 per share, valuing the company at 21x its FY28E earnings. However, the brokerage maintained its ‘Add’ rating, as it believes the company continues to hold a strong near- to medium-term outlook, despite the evolving landscape of artificial intelligence (AI) disruption, supported by a robust deal pipeline and a strategic focus on legacy modernisation. 

While AI-led efficiencies are gaining traction, their impact remains limited in complex "brownfield" enterprise environments, allowing the traditional services model to remain viable even as pricing structures shift toward outcome-based delivery, the brokerage noted.  READ | Antique cuts TCS, HCLTech to 'Hold'; slashes growth estimates on AI risks

 

Why is HDFC Securities cautiously optimistic on Mphasis?

AI impact and pricing pressure

Analysts noted that AI-led deflationary pressure is becoming visible in contract renewals, with discounts nearly doubling from 10 per cent to approximately 20 per cent. This trend has led to a dip in repeat business—now at 80–85 per cent—and an increase in "leakage" to 20–22 per cent. Consequently, Mphasis’s ability to deliver double-digit growth now hinges heavily on securing net-new deal wins rather than relying solely on existing accounts.

Modernisation pipeline doubles

A key highlight is the company’s legacy modernisation pipeline, which has doubled year-on-year (Y-o-Y). While large global BFSI Global Capability Centers (GCCs) handle traditional back-end tasks, clients continue to outsource complex modernisation projects. Mphasis is positioning itself as a provider of model-agnostic platforms that integrate with existing systems, catering to clients who prefer integration over full architectural rebuilds.

Margin and earnings outlook

Margins are expected to remain stable as execution quality offsets AI investment costs, while hedging-related losses are currently balancing out gains from currency depreciation. However, anticipating a slower conversion of revenue from the pipeline, the brokerage has cut earnings estimates by 4 per cent and 8 per cent for FY27 and FY28, respectively. 

Disclaimer: Views and recommendations are those of the brokerage/analyst and are not endorsed by Business Standard. Readers should consult a financial adviser before taking investment decisions.