NeoZeta And NeoCrux Integration Will Unlock New Market Opportunities

Key Takeaways

• The integration of AI platforms enhances deal sizes and modernization opportunities, expanding the market and boosting future revenues and net margins.
  
• Strong pipeline growth and significant large deal activity highlight opportunities for revenue growth and improved operational efficiency.
  
• Challenges in logistics and high competitive intensity may pressure margins and question the sustainability of AI-led productivity gains impacting long-term revenue.

Catalysts

Operates as an information technology solutions provider that specializes in cloud and cognitive services in the United States, India, Europe, the Middle East, Africa, and internationally.

• The integration of AI platforms like Mphasis NeoZeta and NeoCrux is expected to supersize deals, unlocking modernization opportunities and expanding the total addressable market, positively impacting future revenue growth.
  
• The ability to augment AI projects with human capabilities is changing ROI economics, allowing for quicker transformations and modernization efforts that were previously cost-prohibitive, likely leading to an increase in net margins.
  
• The strong pipeline growth, with BFS pipeline up 58% Y-o-Y and non-BFS pipeline up 44% Y-o-Y, alongside a 49% increase in large deals sequentially, indicates potential for significant revenue growth.
  
• The ongoing shift towards automation and productivity gains—from AI-driven efforts and the establishment of the Cyber Fusion Center—supports enhanced operational efficiency, likely improving net margins.
  
• Focus on large deal activity, proactive wins, and an improvement in TCV closures by $351 million, with a high conversion pace from TCV to revenue earmarked, suggests potential for earnings growth through revenue acceleration.

Mphasis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mphasis's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.8% today to 13.3% in 3 years time.
• Analysts expect earnings to reach ₹26.7 billion (and earnings per share of ₹139.9) by about January 2028, up from ₹16.5 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 34.3x on those 2028 earnings, down from 34.6x today. This future PE is greater than the current PE for the IN IT industry at 32.8x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.65%, as per the Simply Wall St company report.

Mphasis Future Earnings Per Share Growth

Risks

• The company faces challenges in the logistics vertical, where there has been a decline not attributed to a single customer. This could indicate industry-specific challenges or broader macroeconomic factors impacting this segment, potentially affecting revenue negatively.
  
• The sharp decline in headcount over the last three years (down 15%) despite a 5% revenue increase during the same period may suggest over-reliance on productivity gains, which could lead to risks if efficiency gains do not sustain. This might pressure margins if increased hiring becomes necessary.
  
• There are supply chain and macroeconomic headwinds that could affect global demand in segments like logistics and non-airline transportation, potentially impacting the company's overall revenue growth.
  
• High competitive intensity in large deal consolidation, with some competitors possibly focusing more on savings, may limit Mphasis's ability to secure profitable pricing, thus compressing net margins.
  
• There are questions about the sustainability of AI-led productivity gains given that the company may need to pass on some benefits to customers, as industry peers have experienced, potentially affecting long-term earnings if efficiency-led gains are reinvested into pricing discounts.

Valuation

• The analysts have a consensus price target of ₹3191.12 for Mphasis based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3800.0, and the most bearish reporting a price target of just ₹2130.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹201.2 billion, earnings will come to ₹26.7 billion, and it would be trading on a PE ratio of 34.3x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹3008.7, the analyst's price target of ₹3191.12 is 5.7% 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.