Mphasis shares rise 4% to hit 2-year high after Nuvama upgrades rating to ’buy’

Mphasis, a global IT solutions provider, saw its shares rise for the sixth consecutive trading session on Thursday, climbing 4 per cent to reach a two-year high of ₹3,153 per share. This surge followed Nuvama Institutional Equities' upgrade of the stock from 'hold' to 'buy,' with a target price of ₹3,500, citing improved growth prospects.

According to the brokerage, the company has experienced sluggish growth in recent years, with a 7.8 per cent decline in FY23 and a 6.3 per cent drop in FY24. However, it anticipates a reversal of this trend as the macroeconomic environment improves.

The company’s banking and financial services (BFS) and mortgage segments, which contribute 47 per cent and 6 per cent of revenue, respectively, were negatively impacted by high interest rates. The brokerage now expects growth to pick up as interest rates are expected to decrease.

Nuvama highlighted that anticipated interest rate cuts in the US are expected to revive tech spending by American corporations, which has been stalled for nearly two years. As Mphasis’s mortgage business is highly sensitive to interest rate changes, a sharp recovery is expected.

Additionally, it noted that the company's major client, a BFS corporation, has announced record tech spending for 2024, further enhancing the company's growth outlook.

The brokerage has also noted that the company's core business remains strong. It said the company has successfully diversified its revenue base, reducing its reliance on the DXC channel, which now contributes just 3 per cent to its top line, down from 28 per cent in FY19.

Moreover, Mphasis is making significant advancements in the Gen-AI space with platforms like NeoZeta and NeoCrux, which are designed to modernise legacy systems and improve the software development lifecycle, it added.

Mphasis reported a consolidated net profit of ₹404 crore for the June quarter, a 3 per cent increase from the fourth quarter of FY24. Its 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 per cent quarter-on-quarter and 3.1 per cent year-on-year.

Second-half recovery expected

Centrum Broking noted that the overall performance of IT companies in the June quarter was muted, with revenue growth and operating margins broadly in line with expectations. It said that the clients remain cautious about the macroeconomic environment and discretionary tech spending remains weak.

However, the brokerage highlighted some positive developments, particularly in the banking, financial services, and insurance (BFSI) segment, where client interest in high-priority IT projects is growing. Deal wins remain strong across the sector, with an increasing number of longer-duration contracts. The conversion of total contract value (TCV) to revenue showed a slight improvement compared to previous quarters.

Centrum Broking remains optimistic about the IT sector's medium-to-long-term outlook, driven by increasing digitalisation across enterprises and rising demand for GenAI-based solutions. The brokerage expects performance to improve in the second half of FY25, supported by a low base in FY24, the ramp-up of recently signed deals, and growing traction in Gen AI-based solutions.

Earlier last week, Reuters reported that global banks were 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, as highlighted in their recent earnings calls, could potentially have a broader positive impact, the report noted.