Portfolio expansion to aid Mphasis’ revenue growth

Near-term returns may be muted

The stock price of Mphasis, India’s eighth largest software services company by market capitalisation, rose about 1.8 per cent in trade on Wednesday after it announced the acquisition of Us-based Blink Interactive. The stock ended the session at ~3,253 apiece, a rise of 1.7 per cent.

Mphasis acquired the company, which offers design consultancy services around User Experience (UX) 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 calendar year 2024 (CY24) and growth rates in upstream user research, strategy and design to 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 because of performance-based retention and amortisation costs. Margins are expected to stabilise by financial year 202223 (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 the biggest positive for Mphasis is higher TAM opportunity and expanded relationship with large Us-based technology clients. Its 65 customers include companies like Facebook, Amazon, Tmobile, 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 FY2124 period of 20 per cent in the direct business segment, expanding margins and attractive dividend yield,” says Kulkarni. The brokerage has a ‘buy’ recommendation with a two-year target price of ~3,470.

Given the current market price (~3,253 apiece) 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.