NeoZeta And NeoCrux Will Revolutionize Service Delivery With AI

Key Takeaways

• Mphasis is leveraging AI advancements and platforms to enhance revenue growth, reduce labor costs, and improve net margins and earnings.
  
• The company is positioned for sustainable growth with a strong AI-led pipeline and improved TCV-to-revenue conversion driving operational efficiencies.
  
• Geopolitical tensions, economic uncertainty, and strategic shifts to AI may disrupt Mphasis's revenue growth and stability, affecting traditional service delivery and deal closures.

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.

• Mphasis is seeing increased focus on implementing AI at scale across industries, with AI-led transformations expected to enhance revenue growth and shift the company towards a technology-led arbitrage model, potentially improving net margins.
  
• The company is leveraging platforms like NeoZeta and NeoCrux to augment human capabilities with AI, which can lead to more attractive modernization cases, reducing labor costs, and improving earnings and net margins.
  
• Mphasis has a strong pipeline with 35% being AI-led, up 23% year-over-year, indicating robust future revenue opportunities as large clients continue to drive accelerated digital adoption.
  
• The company is reporting higher proactive deal wins and an improved pace of TCV-to-revenue conversion, suggesting that revenue growth and earnings could see steady improvement through the fiscal year.
  
• The focus on Savings Led Transformation and capturing consolidation opportunities positions Mphasis to drive operational efficiencies and potentially improve EBIT margins within their target band, supporting sustainable earnings growth.

Mphasis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mphasis's revenue will grow by 11.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 13.4% in 3 years time.
• Analysts expect earnings to reach ₹25.5 billion (and earnings per share of ₹133.68) by about December 2027, up from ₹15.9 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 35.3x on those 2027 earnings, down from 37.8x today. This future PE is lower than the current PE for the IN IT industry at 45.0x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.62%, as per the Simply Wall St company report.

Mphasis Future Earnings Per Share Growth

Risks

• Geopolitical tensions and upcoming U.S. elections may create a climate of caution, impacting Mphasis's revenue stability and growth.
  
• The shift from a labor arbitrage model to technology-led arbitrage due to AI transformation could disrupt traditional service delivery methods, affecting net margins if not managed efficiently.
  
• Economic uncertainty and strategic cost-cutting by clients could potentially elongate decision cycles and delay deal conversions, affecting Mphasis's earnings.
  
• Interest rate fluctuations and the pace of monetary policy easing could bring volatility to the mortgage business segment, which remains unpredictable and could impact revenue consistency.
  
• Increased scrutiny on return on investment and AI integration in large transformation deals could slow down deal closures, impacting the company's projected revenue growth.

Valuation

• The analysts have a consensus price target of ₹3145.0 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 2027, revenues will be ₹189.9 billion, earnings will come to ₹25.5 billion, and it would be trading on a PE ratio of 35.3x, assuming you use a discount rate of 14.6%.
• Given the current share price of ₹3181.1, the analyst's price target of ₹3145.0 is 1.1% lower. 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.