Global Diversification And AI/ML Adoption Will Strengthen Future Operations

Key Takeaways

• Diversified markets and reduced client concentration enhance MPS's revenue stability and growth prospects, particularly in North America and APAC.
  
• Efforts in eLearning and AI-driven innovations could boost margins and efficiency, while strategic acquisitions support revenue growth.
  
• Heavy reliance on a few major clients and offshore operations presents revenue stability and margin efficiency risks, while AI/ML and acquisitions carry regulatory and integration challenges.

Catalysts

Provides platforms and services for content creation, full-service production, and distribution to the publishers, learning companies, corporate institutions, libraries, and content aggregators in India, Europe, the United States, and internationally.

• MPS has reduced client concentration and increased geographical diversity, with significant revenues from North America and APAC, which could enhance revenue stability and future growth.
  
• Significant growth opportunities are noted in the Content Solutions segment, driven by the education business, strategic operational efficiencies, and new client acquisitions, indicating potential strong revenue growth.
  
• The eLearning business has improved its margin profile through strategic rightsizing, optimizing resource allocation, and flexible delivery models, which could lead to a sustainable increase in net margins.
  
• MPS Labs is focused on AI/ML-driven solutions and innovative tool development, positioning MPS to streamline operations and potentially increase efficiency-related earnings.
  
• The acquisition of AJE and the strategic integration of platforms like HighWire with AI-powered solutions offer avenues for substantial revenue growth and improved EBITDA margins through operational leverage and client expansion.

MPS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MPS's revenue will grow by 13.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 18.8% today to 20.7% in 3 years time.
• Analysts expect earnings to reach ₹2.1 billion (and earnings per share of ₹123.18) by about January 2028, up from ₹1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.7x on those 2028 earnings, down from 31.7x today. This future PE is greater than the current PE for the IN Media industry at 25.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.62%, as per the Simply Wall St company report.

MPS Future Earnings Per Share Growth

Risks

• The concentration of revenue from the top 15 customers, who contribute 58% of total revenue, implies a dependency risk. If even a few major clients decide to pull back or switch providers, it could negatively impact MPS's revenue stability.
  
• There is a risk of achieving the projected increased margin efficiencies through offshore operations, which if not managed well, could lead to increased operational costs and reduce overall net margins and earnings.
  
• Continued reliance on operational efficiency and strategic business development carries execution risks. If MPS fails to maintain cost efficiencies or strategic initiatives don't yield expected results, it could impact both future revenue growth and net margins.
  
• Given the aggressive implementation of AI/ML-based solutions, there may be concerns associated with data privacy and security. If not addressed adequately, these concerns could result in regulatory penalties or client attrition, impacting revenues and profitability.
  
• The platform business's growth still seems vulnerable, particularly due to integration challenges with recent acquisitions like AJE. If these integrations take longer than anticipated or face hurdles, MPS could see temporary impacts on EBIT margins and eventual earnings growth.

Valuation

• The analysts have a consensus price target of ₹2630.0 for MPS based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹10.1 billion, earnings will come to ₹2.1 billion, and it would be trading on a PE ratio of 28.7x, assuming you use a discount rate of 12.6%.
• Given the current share price of ₹2442.9, the analyst's price target of ₹2630.0 is 7.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.