Mphasis, a global IT solutions provider, has seen its shares surge for the sixth consecutive trading session, climbing by 4% on Thursday to reach a two-year high of ₹3,153 per share. This impressive rally was spurred by an upgrade from Nuvama Institutional Equities, which raised its rating on Mphasis from 'hold' to 'buy,' with a revised target price of ₹3,500. The brokerage cited improved growth prospects as a key factor behind the upgrade.

Nuvama’s Rationale for the Upgrade

In its analysis, Nuvama noted that Mphasis has faced challenges in recent years, with sluggish growth reflected in a 7.8% decline in FY23 and a 6.3% drop in FY24. However, the brokerage anticipates a reversal of this trend as the macroeconomic environment shows signs of improvement. Particularly, the company’s banking and financial services (BFS) and mortgage segments, which contribute 47% and 6% of its revenue, respectively, were negatively impacted by high interest rates.

Nuvama expects growth in these segments to accelerate as interest rates in the US are projected to decrease. The brokerage highlighted that anticipated interest rate cuts in the US are likely to revive tech spending by American corporations, which has been stalled for nearly two years. Given that Mphasis's mortgage business is highly sensitive to interest rate changes, a sharp recovery in this area is expected.

Moreover, Nuvama pointed out that Mphasis’s major client, a leading BFS corporation, has announced record tech spending for 2024, further enhancing the company’s growth outlook. The brokerage also emphasized that Mphasis has successfully diversified its revenue base, reducing its reliance on the DXC channel, which now contributes just 3% to its top line, down from 28% in FY19.

Advances in Gen-AI and Strong Core Business

Another factor contributing to the positive outlook for Mphasis is its significant advancements in the Gen-AI space. The company is making strides with platforms like NeoZeta and NeoCrux, which are designed to modernize legacy systems and improve the software development lifecycle. These innovations are expected to play a crucial role in the company’s future growth.

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Financial Performance and Sector Outlook

Mphasis reported a consolidated net profit of ₹404 crore for the June quarter, representing a 3% increase from the fourth quarter of FY24. The company’s revenue remained flat at ₹3,422 crore, compared to ₹3,412 crore in the previous quarter. On a constant currency basis, the topline grew 0.1% quarter-on-quarter and 3.1% year-on-year.

According to Centrum Broking, the overall performance of IT companies in the June quarter was muted, with revenue growth and operating margins broadly in line with expectations. Clients remain cautious about the macroeconomic environment, and discretionary tech spending is still weak. However, Centrum noted positive developments in the banking, financial services, and insurance (BFSI) segment, where client interest in high-priority IT projects is growing. The brokerage remains optimistic about the IT sector’s medium-to-long-term outlook, driven by increasing digitalization across enterprises and rising demand for Gen-AI-based solutions.

Positive Developments in the Global IT Landscape

Earlier last week, Reuters reported that global banks are beginning to revive technology projects that were put on hold in 2023. This development brings renewed optimism for India’s $254 billion IT sector, which derives roughly a third of its revenue from BFSI clients. The resurgence in demand for tech services from major banks like JPMorgan Chase and Bank of America could potentially have a broader positive impact on Mphasis and the sector at large.

Looking Ahead

As Mphasis continues to capitalize on improving macroeconomic conditions, particularly in the BFSI and mortgage segments, and advances in Gen-AI, the company is well-positioned for a recovery in growth. With the anticipated interest rate cuts in the US and renewed tech spending by major global banks, the outlook for Mphasis and the broader IT sector remains positive, with significant upside potential in the second half of FY25.

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