AI-led Transformation Will Unlock BFS And TMT Markets

Key Takeaways

• Mphasis's AI-driven transformation deals in BFS and TMT sectors are poised to boost revenue growth and enhance margins through operational efficiencies.
  
• Strategic investments in AI platforms and next-gen technologies aim to deepen client relationships and support earnings growth by expanding market opportunities.
  
• Macroeconomic uncertainties and reliance on AI-driven deals may pressure margins and delay growth in logistics, transportation, BFSI, and healthcare sectors.

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 focusing on capturing opportunities in BFS (Banking, Financial Services) and TMT (Technology, Media, Telecommunications) verticals through AI-led transformation deals. This strategy is expected to drive significant revenue growth as the company continues to win large deals.
  
• Continued investment in AI platforms and solutions, such as NeoZeta and NeoCrux, is anticipated to enhance client offerings, improve efficiencies, and drive cost savings. This should positively impact net margins by minimizing project risk and achieving higher operational efficiencies.
  
• An expanding addressable market through AI-driven legacy modernization and transformation is set to propel pipeline growth, with expectations of robust TCV (Total Contract Value) conversion into revenue. This points to an increase in future earnings as the pipeline converts.
  
• With a strong performance in terms of pipeline growth at record levels (86% year-over-year), Mphasis is likely to see improved margins and EPS as it continues to execute AI-driven deals, signaling a potential increase in earnings due to the ongoing transformation in service delivery.
  
• The strategic focus on AI is creating differentiated offerings that can attract new clients as well as deepen engagements with existing clients, leading to increased revenues. Additionally, investments in next-generation technologies, such as quantum machine learning, are expected to reinforce Mphasis's market positioning and further drive earnings growth.

Mphasis Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mphasis's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.0% today to 12.9% in 3 years time.
• Analysts expect earnings to reach ₹24.2 billion (and earnings per share of ₹125.8) by about May 2028, up from ₹17.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.2x on those 2028 earnings, up from 27.6x today. This future PE is greater than the current PE for the IN IT industry at 26.7x.
• Analysts expect the number of shares outstanding to grow by 0.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.44%, as per the Simply Wall St company report.

Mphasis Future Earnings Per Share Growth

Risks

• Macroeconomic uncertainties, such as tariffs and global trade impacts, create indecision in segments like logistics, supply chain, and manufacturing, potentially delaying CapEx and transformation projects, impacting future revenue growth.
  
• The Banking, Financial Services, and Insurance (BFSI) and healthcare sectors face second-order impacts, including economic outlook and consumer health which may lead to delays in decision-making and affect earnings.
  
• The logistics and transportation vertical faced a sequential revenue decline, exacerbated by broad-based client hesitations and direct exposure to macro uncertainties, potentially impacting net margins.
  
• High reliance on AI-driven deals could face risks if customers demand more significant savings and efficiency gains, pressuring Mphasis to pass on productivity improvements, which might compress net margins.
  
• Elevated on-site (offshore) concentration challenges the traditional cost structure and rate-card assumptions, where increased cost pressure may counteract margin expansion benefits from solutions-led transitions, affecting profitability.

Valuation

• The analysts have a consensus price target of ₹2713.667 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 ₹3400.0, and the most bearish reporting a price target of just ₹2140.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹187.1 billion, earnings will come to ₹24.2 billion, and it would be trading on a PE ratio of 33.2x, assuming you use a discount rate of 15.4%.
  
• Given the current share price of ₹2470.35, the analyst price target of ₹2713.67 is 9.0% 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.