Chirag Rajendra Shah

K. J. Somaiya Institute of Management

Studies & Research, Mumbai.

MphasiS Ltd.
Equity Research Report

COMPANY INFORMATION:
Mphasis is an IT services company based in Bangalore, India. The company provides infrastructure
technology and applications outsourcing services, as well as architecture guidance, application
development and integration, and application management services. It serves financial services, telecom,
logistics, and technology industries. Mphasis was ranked #7 in India IT companies and overall #189
by Fortune India 500 in 2019. In April 2016, Hewlett Packard Enterprise sold the majority of its stake in
Mphasis to Blackstone Group LP for around US$1 billion.
The markets served by the company are financial services and insurance, healthcare, manufacturing,
government, transportation, communications, and consumer and retail industries. Mphasis applies next-
generation technology to help enterprises transform businesses globally. Customer centricity is
foundational to Mphasis and is reflected in the Mphasis’ Front2Back Transformation approach.
Front2Back uses the exponential power of cloud and cognitive to provide hyper-personalized
(C=X2C2TM=1) digital experience to clients and their end customers. Mphasis’ Service Transformation
approach helps ‘shrink the core’ through the application of digital technologies across legacy
environments within an enterprise, enabling businesses to stay ahead in a changing world. Mphasis’ core
reference architectures and tools, speed and innovation with domain expertise and specialization are key
to building strong relationships with marquee clients.

Founded: 1998
Industry Name: COMPUTERS - SOFTWARE
House Name: Public Sector
Traded as- REGISTERED CORPORATE OFFICE:
BSE: 526299
Address:
NSE: Bagmane World Technology, Center Marathahalli, Outer Ring Road,,Doddanakundi
MPHASIS
ISIN: Village, Bengaluru
 INE356A01018 – 560048
Tel. No.:
Headquarters: 080-67501000
Bengaluru, Karnataka, India.
Email: [email protected]
Website: http://www.mphasis.com

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JOURNEY SO FAR:

Mphasis begins as high end technology architecting firm

1998

Mphasis acquired Kshema Technologies &Onida Info Tech Exceeds

2004 $ 100MM in revenue

Acquired Princeton Consulting & Eldorado Computing EDS acquires

2006 62% stake in Mphasis

HP acquires EDS and Mphasis

2008

Mphasis acquired AIG Software Solutions EDS re-branded to

2009 become HP Enterprise

Mphasis global expansion - Sri Lanka, Australia & Poland Mphasis

2010 acquired Fortify IS

Mphasis acquires WYDE

2011

Mphasis acquires Digital Risk LLC

2013

Blackstone acquires ~61% stake in Mphasis from HPE

2016

Global view of IT Industry:

The global information technology industry is on pace to reach $5.2 trillion in 2020. The United States is
the largest tech market in the world, representing 32% of the total, or approximately $1.7 trillion for
2020. In the U.S., as well as in many other countries, the tech sector accounts for a significant portion of
economic activity. Despite the size of the U.S. market, the majority of technology spending (68%) occurs
beyond its borders. Spending is often correlated with factors such as population, GDP, and market
maturity. Among global regions, Western Europe remains a significant contributor, accounting for
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approximately one of every five technology dollars spent worldwide. However, as far as individual
countries go, China has clearly established itself as a major player in the global tech market. China has
followed a pattern that can also be seen in developing regions, where there is a twofold effect of closing
the gap in categories such as IT infrastructure, software, and services, along with staking out leadership
positions in emerging areas such as robotics.

The bulk of technology spending stems from purchases made by corporate or government entities. A
smaller portion comes from household spending, including home-based businesses.

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While emerging technologies currently account for only 17% of the overall global revenue, they are
expected to drive nearly half of the growth in new revenue.

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Rapid change is happening across the IT channel today, affecting business models, the competitive
landscape, customer types, buying patterns, M&A activity and more. Technology and the business of
selling it has grown far more complex. What was once a fairly stable set of infrastructure products in a
channel provider’s portfolio has, in the cloud age, morphed into myriad choices around software-as-a-
service applications, data tools, and a stack of emerging technologies.

IT Industry in India:
The global sourcing market in India continues to grow at a higher pace compared to the IT industry. India
is the leading sourcing destination across the world, accounting for approximately 55 per cent market

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share of the US$ 185-190 billion global services sourcing business in 2017-18. Indian IT & ITeS companies
have set up over 1,000 global delivery centres in about 80 countries across the world.

India has become the digital capabilities hub of the world with around 75 per cent of global digital talent
present in the country. The IT sector in India stood at US$177 billion in 2019 witnessing a growth of 6.1
per cent year-on-year and is estimated that the size of the industry will grow to US$ 350 billion by 2025.
India’s IT & ITeS industry grew to US$ 181 billion in 2018-19. Exports from the industry increased to US$
137 billion in FY19 while domestic revenues (including hardware) advanced to US$ 44 billion. IT industry
employees 4.1 million people as of FY19.
Spending on information technology in India is expected to reach US$ 90 billion in 2019.
Revenue from digital segment is expected to comprise 38 per cent of the forecasted US$ 350 billion
industry revenue by 2025.

Indian IT's core competencies and strengths have attracted significant investments from major countries.
The computer software and hardware sector in India attracted cumulative Foreign Direct Investment (FDI)
inflows worth US$ 43.58 billion between April 2000 and December 2019 and ranks second in inflow of
FDI, as per data released by the Department for Promotion of Industry and Internal Trade (DPIIT).

Company Highlights:

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COMPANY MANAGEMENT:
Board of Directors:

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Key Management Personnel:

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FINANCIALS OF THE COMPANY:
Balance Sheet
Narration Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

Equity Share Capital 210.15 210.19 210.42 193.27 186.23

Reserves 5,269.62 5,660.67 5,942.03 5,288.52 5,063.59

Borrowings 575.27 460.76 260.16 389.88 542.59

Other Liabilities 1,311.62 1,076.34 888.64 1,108.70 1,575.87

Total 7,366.66 7,407.96 7,301.25 6,980.37 7,368.28

Net Block 2,333.74 1,596.89 1,921.14 1,884.03 2,169.73

Capital Work in Progress 20.43 55.59 1.08 2.26 2.92

Investments 1,443.10 2,122.29 2,395.65 1,782.07 1,329.22

Other Assets 3,569.39 3,633.19 2,983.38 3,312.01 3,866.41

Total 7,366.66 7,407.96 7,301.25 6,980.37 7,368.28

Working Capital 2,257.77 2,556.85 2,094.74 2,203.31 2,290.54

Debtors 625.20 648.93 627.87 811.63 955.37

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Profit & Loss Account
Narration Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

Sales 5,794.81 6,080.78 6,076.36 6,545.84 7,730.98

Expenses 4,927.88 5,217.88 5,112.90 5,483.91 6,407.15

Operating Profit 866.93 862.90 963.46 1,061.93 1,323.83

Other Income 196.74 172.26 228.78 149.47 176.71

Depreciation 98.07 121.08 79.15 70.82 75.84

Interest 27.92 24.16 13.88 13.00 17.37

Profit before tax 937.68 889.92 1,099.21 1,127.58 1,407.33

Tax 263.04 258.42 307.63 290.08 333.98

Net profit 674.64 631.51 791.58 837.50 1,073.35

EPS 32.11 30.04 37.62 43.33 57.65

Price to earning 12.00 16.37 15.41 19.34 17.19

Price 385.40 491.80 579.90 837.75 991.10

Cash Flow Statement:

Narration Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

Cash from Operating Activity 616.46 730.81 664.11 723.32 949.72

Cash from Investing Activity -379.84 -174.74 266.58 507.34 279.85

Cash from Financing Activity -186.33 -567.82 -710.02 -1,379.74 -1,341.77

Net Cash Flow 50.29 -11.75 220.66 -149.09 -112.20

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SHARE HOLDING PATTERN:
Share holding pattern:
Standalone Mar-20 Dec-19 Sep-19 Jun-19
Promoters 56.18 52.2 52.22 52.23
Pledged 0 0 0 0

FII/FPI 23.87 28.52 28.78 29.91

Total DII 15.26 14.82 14.44 13.23
Fin.Insts 2.08 2.07 1.49 0.51
Insurance Co 5.26 4.63 4.32 0
MF 6.78 7.17 7.82 7.47
Others DIIs 1.14 0.95 0.81 5.25

Others 4.68 4.46 4.54 4.64

Total 99.99 100 99.98 100.01

DIVIDEND & RIGHTS:

Dividend:
Announcement Date Effective Date Dividend Type Dividend (%)
28-05-19 11-07-19 Final 270
10-05-18 26-07-18 Final 200
26-05-17 13-07-17 Final 170
28-09-16 19-10-16 Final 200
25-05-15 25-08-15 Final 160

Bonus:

Announcement Date Bonus Ratio Record Date Ex-Bonus Date

11-04-05 1:01 14-11-05 11-11-05
08-04-04 1:01 27-05-04 26-05-04
17-04-03 1:01 03-07-03 02-07-03

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RATIOS:

Mar-20 Mar-19 Mar-18 Mar-17 Mar-16

Basic EPS (Rs.) 64.66 40.18 37.69 29.76 21.78

Diluted EPS (Rs.) 64.17 39.78 37.63 29.71 21.75

Cash EPS (Rs.) 72.81 43.38 39.93 30.96 23.12

Book Value
[ExclRevalReserve]/Shar 197.12 175.25 202.18 223.14 214.28
e (Rs.)
Book Value
[InclRevalReserve]/Shar 197.12 175.25 202.18 223.14 214.28
e (Rs.)
Dividend / Share(Rs.) 35 27 20 17 20

Revenue from
233.04 184.4 169.45 143.45 139.09
Operations/Share (Rs.)

PBDIT/Share (Rs.) 85.98 54.65 50.74 40.87 32.56

PBIT/Share (Rs.) 77.77 52.59 49.09 39.61 31.19

PBT/Share (Rs.) 74.39 52.23 48.14 39.27 28.89

Net Profit/Share (Rs.) 64.6 41.32 38.28 29.7 21.75

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Key Profitability Ratios:
40

35

30

25
PBDIT Margin (%)
20 Net Profit Margin (%)
Return on Networth / Equity (%)
Return on Assets (%)
15

10

0
Mar-20 Mar-19 Mar-18 Mar-17 Mar-16

Liquidity Ratio:
Mar-20 Mar-19 Mar-18 Mar-17 Mar-16
Current Ratio
2.11 2.11 3.29 4.88 3.84
(X)
Quick Ratio
2.11 2.11 3.29 4.88 3.84
(X)
Inventory
Turnover 0 0 0 0 713.26
Ratio (X)
Dividend
Payout Ratio 0 50.25 53.4 80.93 73.46
(NP) (%)
Dividend
Payout Ratio 0 47.86 51.2 77.66 69.11
(CP) (%)
Earnings
Retention 0 49.75 46.6 19.07 26.54
Ratio (%)

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Valuation Ratios:

Mar-20 Mar-19 Mar-18 Mar-17 Mar-16

Enterprise
11,881.81 18,506.73 16,224.69 11,907.30 9,932.18
Value (Cr.)
EV/Net
Operating 2.73 5.39 4.95 3.94 3.4
Revenue (X)
EV/EBITDA (X) 7.41 18.18 16.55 13.85 14.51
MarketCap/Net
Operating 2.85 5.36 4.98 4.03 3.52
Revenue (X)
Retention
0 49.74 46.59 19.06 26.53
Ratios (%)

Price/BV (X) 3.37 5.64 4.17 2.59 2.29

Price/Net
Operating 2.85 5.36 4.98 4.03 3.52
Revenue
Earnings Yield 0.1 0.04 0.05 0.05 0.04

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Peer Comparison:

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TECHNICALS:

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EFFECT OF COVID-19:
IT outsourcing is one of the most flourishing industries in the world. However, with the outbreak of
coronavirus; a mixed impact is expected on the IT outsourcing industry. As many economies are
continuing with the lockdown due to the Covid-19 issue, revenue generation for most companies across
sectors has been affected while rate of unemployment has also inched upwards. Amidst fear of
worsening economic conditions, the countries and companies largely dependent on outsourcing are
trying to control the IT service imports so that they can employ their own resources to the assigned job.
As per the UN’s report, India is among the 15 most affected economies due to the COVID-19 pandemic.
While there have been no contract cancellations so far by the service partners in various geographies,
many clients have asked for reduced support for application and maintenance services. The disruption of
world trade due to the pandemic, is expected to have a trade impact of USD 348 million on India,
although it is very low in comparison to its counterparts such as Europe (including the UK), the US, Japan
and South Korea.

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The revenue is expected to be reduced by approximately 2-7% largely impacted by the slowdown in
decision making, delay in pipeline conversion and project execution and pricing impact on core business.
However, many businesses who has never given a thought of outsourcing could capitalize on this
situation to partner with a few outsourcing firms during this time to stretch their wings. Now companies
are adopting work from remote location, thereby requiring more cloud services and  IT applications to
effectively enhance and strengthen their information related security from cyber-attacks. So on one side,
when the Indian IT industry is expected to witness pressure on new contracts and pricing, there are
segments within the IT domain wherein outsourcing is anticipated to increase. Near term issues persist,
though the same problems are likely to open new opportunities to some within the outsourcing services
area.

My Recommendation:
India is the topmost offshoring destination for IT companies across the world. Having proven its
capabilities in delivering both on-shore and off-shore services to global clients, emerging technologies
now offer an entire new gamut of opportunities for top IT firms in India. Export revenue of the industry is
expected to grow 7-9 per cent year-on-year to US$ 135-137 billion in FY19. The industry is expected to
grow to US$ 350 billion by 2025.
The company’s financials look healthy and also its presence worldwide with wide variety of services it
offers makes it a good pick.
Hence my view for this script is to BUY on a long term perspective.

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