For Mphasis, softness in mortgage segment is a dampener
Premium- Mphasis management has cautioned against some pockets of weakness such as deferment in spending by some clients and furloughs by a few others.
The near-term outlook for tier-II IT services provider Mphasis Ltd is not very encouraging. This is despite the company's deal win momentum and deal pipeline being steady. Relatively higher exposure to the mortgage segment is seen as a dampener, especially in the backdrop of rising interest rates in the US. Also, the company's management has cautioned against some pockets of weakness such as deferment in spending by some clients and furloughs by a few others.
In an interaction with analysts at Emkay Global Financial Services Ltd, the company's management said it is not experiencing a slowdown in demand environment. Note that the company's management has guided for Ebit (earnings before interest and tax) margin to be in the range of 15.25-17% through all four quarters of FY23. The medium-term up move in margin will be aided by operating leverage, employee pyramid correction and offshoring.
Nonetheless, the brokerage house is striking a note of caution. "Focus on proactive large deal origination, steady expansion in competencies, client mining, new logo additions, and steady increase in deal sizes and tenure led to healthy deal TCV wins and revenue conversion," Emkay Global said in a report on 23 August. However, weakness in mortgage business and furloughs in a few accounts are likely to weigh on near-term revenue growth, it said.
Meanwhile, in Q1FY23, the company saw 2.4% sequential growth in its revenue in constant currency in its direct business.
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In this calendar year so far, the Mphasis stock has declined by around 35%, higher than sector index Nifty IT's 26% fall. Apart from the aforementioned challenges, investors in this stock also need to monitor the development in its DXC business, which has been an overhang for the stock in the recent past.
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