CMP: INR540 TP: INR570 (+6%) Neutral Sanguine deal signings

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1 23 July 2016 Results Update Sector: Technology Mphasis BSE SENSEX S&P CNX 27,803 8,541 Motilal Oswal values your support in the Asiamoney Brokers Poll 2016 for India Research, Sales and Trading team. We request your ballot. Bloomberg MPHL IN Equity Shares (m) M.Cap.(INRb)/(USDb) / Week Range (INR) 622 / 382 1, 6, 12 Rel. Per (%) -4/6/28 Avg Val, INRm 129 Free float (%) 39.5 Financials & Valuations (INR b) Y/E Mar E 2018E Net Sales EBITDA NP EPS (INR) EPS Gr. (%) BV/Sh. (INR) RoE (%) RoCE (%) Payout (%) Div. Yield Estimate change TP change Rating change CMP: INR540 TP: INR570 (+6%) Neutral Sanguine deal signings lend confidence to continued traction in Direct International channel Delivering in the focus areas: MPHL reported revenue decline of 0.3% QoQ to USD225m in 1QFY17 (compared to our estimate of USD227.5m). Direct International (ex. Digital Risk) segment grew 2.1% QoQ, continuing the momentum in its focus area. Overall performance was weighed upon by decline in the HP channel (-4.2% QoQ), decline in the Direct emerging business (-8.5% QoQ) and flat revenue in Digital Risk. Deal signings of USD90m during the quarter, higher than the run-rate seen in FY16 (total of USD303m TCV in FY16), lend confidence and visibility of growth. HP Channel to stabilize in 2QFY17: The management has been indicating stabilization of the HP Channel 2Q onwards. In 1QFY17, revenue from the HP channel declined by 4.2% QoQ to USD52m. The MSA provides visibility for USD990m in revenue over a five year period, which would imply stability at ~USD50m. MPHL does not expect HPE s merger with CSC to impact the MSA with HP. Margin beat amid improving mix: EBIT margin expanded by 70bp QoQ to 15.2%, above our estimate of 14.3%; reaching mid-point of the guided range of 14-16%. While the bettering revenue mix is aiding margin expansion, this quarter also benefited from a 24% reduction in depreciation expense to the tune of 30bp. Although 2Q will be negatively impacted by wage hikes, the overall revenue mix change is on track to keep the direction right through the course of the year. Valuation and view: Direct International (ex. Digital Risk) has been growing above industry average, and drag on overall performance from HP is easing. At the same time, the reduction in Direct Emerging business and volatility in Digital Risk have been keeping overall revenue growth under check. We expect revenue CAGR of 6.1% and EPS CAGR of 11.0% over FY16-18E. Our target price of INR570 discounts forward operating PAT by 12x added to net cash of INR130/share. Neutral. Ashish Chopra (Ashish.Chopra@MotilalOswal.com); Sagar Lele (Sagar.Lele@MotilalOswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Revenues: Healthy growth in the direct international business MPHL s 1QFY17 reported revenue declined by 0.3% QoQ to USD225m. The decline stemmed out of: [1] 4.2% decline in HP channel, and [2] 8.5% decline in the Direct Emerging markets business. The Direct International business (ex. Digital Risk) grew by 2.1% QoQ and continued the momentum seen over the last six quarters. The company signed deals with a TCV of USD90m during the quarter, which is stronger than the deal signings in FY16, wherein the company had won deals with a TCV of USD303m, providing for good visibility for sustenance of traction. Post Digital Risk s decline in 1HFY16, it has stabilized in 1QFY17. It clocked flat revenue at ~USD35m. HP Channel declined 4.2% QoQ in dollar terms to USD52m. It is expected to stabilize in 2QFY17, post the renewed MSA coming into effect, after the completion of the transaction between HPE and Blackstone. Exhibit 1: Revenue decline led by HP channel, and domestic business Revenue (USD m) Growth (%) Jan-13 Apr-13 Jul-13 Oct-13 Mar-14 Dec-14 Mar-15 Jun-15 Sep-15 Mar 14*: 2M quarter, Jun-14 growth number normalized for comparisonsource: MOSL, Company Exhibit 2: HP channel likely to stabilize 2QFY17 onwards (9.2) Revenues from HP channel - USDm (LHS) QoQ growth - % (RHS) (1.9) (1.9) (1.2) (3.5) (5.5) (4.8) (4.2) (5.5) (6.8) (8.5) (8.9) (8.6) (8.2) (11.8) - (2.0) (4.0) (6.0) (8.0) (10.0) (12.0) (14.0) Jan-13 Apr-13 Jul-13 Oct-13 Mar-14 Dec-14 Mar-15 Jun-15 Sep-15 Mar 14*: 2M quarter, Jun-14 growth number normalized for comparisonsource: MOSL, Company 23 July

3 Exhibit 3: Continued traction in Direct International (ex. Digital Risk) over the last four quarters Revenues from Direct Internation (ex. Digital Risk) (USDm) (1.5) (0.9) QoQ growth - % (RHS) (5.0) Jan-13 Apr-13 Jul-13 Oct-13 Mar-14 Dec-14 Mar-15 Jun-15 Sep-15 Mar 14*: 2M quarter, Jun-14 growth number normalized for comparisonsource: MOSL, Company 1QFY17 Profitability: Changing mix improving profitability EBIT margin expanded by 70bp during the quarter to 15.2%, ahead of our estimate of 14.3%. Gross margin was 28.1%, +20bp QoQ. SGA was lower at 12%, v/s 12.2% in the previous quarter. Together these two contributed to +40bp QoQ to EBIT margins. Depreciation expense was lower by 24% QoQ at INR137m. This led to a further 30bp expansion at the EBIT level. Excluding this too, profitability was a tad better than we expected. EBITDA margins in 1QFY17 were at 16.1% (+40bp), versus our expectation of +20bp. The growth seen in the direct international business and better revenue mix resulting out of the hiving off of the domestic BPO business have been resulting in better profitability for MPHL. Adjusted PAT grew by 6.4% QoQ to INR2.04b, compared to our estimate of INR1.97b, on account of margin beat, and lower depreciation. The company didn t announce a dividend in the quarter. Likely corporate actions in the form of payment of special dividend or buyback will be undertaken by the new Board that will come into action post the closure of the transaction between HPE and Blackstone. Exhibit 4: Margins aided by better revenue mix EBIT Margin (%) S&M as % of Sales Jan-13 Apr-13 Jul-13 Oct-13 Mar-14 Dec-14 Mar-15 Jun-15 Sep-15 Source: MOSL, Company 23 July

4 Exhibit 5: HP revenues now at 23% of total revenue; Digital Risk stable during the quarter HP Channel Direct Channel Digital Risk Rev. (USD m) Jan-13 Apr-13 Jul-13 Oct-13 Mar-14 Dec-14 Mar-15 Jun-15 Sep-15 Apr 13 Jul 13 Oct 13 Jan 14 2M Mar 14 Dec 14 Mar 15 Mar 15 Sep 15 Mar 14*: 2 Month quarter Source: Company, MOSL Change in estimates The quarter s numbers were largely in line; with the minor miss on revenue growth, and minor beat on profitability. As earlier, we are factoring in stabilization of revenue from the HP channel at ~USD50m, continued traction in the Direct International business and growth in Digital Risk. This would lead to revenue growth of 0.3/12.2% in FY17/18E. We expect EBIT margin of 14.5% for FY17E and 14.9% for FY18E. We expect the improvement to be a result of continued improvement of revenue mix. Consequently, our EPS estimates for FY17E and FY18E have moved slightly by 0.8% and 0.2% respectively. Exhibit 6: Change in estimates Revised Earlier Change FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E INR/USD % 0.1% 0.0% USD Revenue - m , , % -0.6% 0.5% EBIT Margin (%) bp -12bp -10bp EPS - INR % 0.8% 0.2% Source: MOSL, Company Valuation and view Our FY18 revenue estimate stands at USD1,041m compares with FY13 (YE October) annual revenues of USD1,025m. Revenues from the HP channel have posted a decline in 19 of the last 20 quarters and now constitutes to ~23% of total revenues. The contribution of the HP channel has significantly reduced in the portfolio, and the company has laid its focus on the direct international channel, which it aims to grow above industry average. There has been significant addition to visibility post the announcement of Blackstone s acquisition of HPE s stake and a revenue commitment by HP to the tune of USD990m in cumulative revenue over a five-year period. However, that doesn t change the fact that overall revenue growth still would remain under pressure in FY17. With strong deal wins, and the hive-off of the domestic BPO business, we estimate MPHL to post growth at a CAGR of 6.1% over FY16-18E. Revenue growth confidence would be the single most important factor for a re-rating. 23 July

5 However, with uneven growth seen in Digital Risk since its acquisition, predictability had been low. But deal wins in core Direct business, along with HPE MSA and management citation that standard deviation in Digital Risk too, should reduce are all incrementally positive. With the improved revenue mix, MPHL has significant scope to improve its margin profile. It raised its EBIT margin guidance by 100bp to 14-16% for FY17. Impressive execution in Direct International business lends visibility of aboveindustry growth in ~55% of MPHL s business. Our target price of INR570 discounts forward operating PAT by 12x, added to expected net cash of INR130/share. Neutral. Key Triggers Momentum gain in Direct International channel Continued uptick in operating margin Pick up in quarterly deals TCV Key risks Continued volatility in Direct Channel emerging markets Failure to grow Direct International channel faster than industry growth Volatility in Digital Risk Exhibit 7: MPHL 1-year forward PE chart Exhibit 8: MPHL 1-year forward PB chart PE (x) Peak(x) Avg(x) Min(x) PB (x) Peak(x) Avg(x) Min(x) Jul-06 Oct-07 Jan-09 Apr-10 Jul-11 Oct-12 Apr-15 Jul-16 Jul-06 Oct-07 Jan-09 Apr-10 Jul-11 Oct-12 Apr-15 Jul-16 Source: Company, MOSL Source: Company, MOSL Exhibit 9: Comparative valuation Company Mkt cap Rating TP (INR) Upside EPS (INR) P/E (x) RoE (%) FY16-18E CAGR (%) (USD b) (%) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E USD rev. EPS Mphasis 1.7 Neutral Mindtree 0.7 Neutral KPIT Tech 0.4 Neutral Cyient 0.8 Buy Hexaware 1.0 Neutral NIIT Tech 0.4 Neutral Persistent Sys. 0.8 Neutral Zensar 0.7 Buy 1, Source: Company, MOSL 23 July

6 Story in charts Exhibit 10: HP Revenues have been declining rapidly Exhibit 11: Now compounded with volatility in digital risk HP Revenues % Change Direct Channel (%) HP Channel (%) FY10 FY11 FY12 FY13 5MFY14 FY15 FY16 FY11 FY12 FY13 5MFY14 FY15 FY16 5MFY14* comparison normalized to be comparable Exhibit 12: India revenue reduced further after sale of BPO operations Exhibit 13: and portfolio issues have dragged EPS lower year after year 7.0 Jan-13 1,728 1, India Revenue % Change , ,359 1,218 1,479 1,462 1,455 1,480 1, ,013 Apr-13 Jul-13 Oct-13 Mar-14* Dec-14 Mar-15 Jun-15 Sep EPS % Change FY10 FY11 FY12 FY13 5MFY14 FY15 FY16 5MFY14* comparison normalized to be comparable Exhibit 14: 14-16% target EBIT margin band EBIT Margin (%) S&M (%) Exhibit 15: Volatility in Digital Risk revenues Digital Risk Rev. (USD m) FY09 FY10 FY11 FY12 FY13 5MFY14 FY15 FY16 FY17 FY18 Apr 13 Jul 13 Oct 13 Jan 14 2M Mar 14 Dec 14 Mar 15 Mar 15 Sep 15 Source: Company, MOSL 23 July

7 Exhibit 16: Operating metrics Oct-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Vertical Contribution (%) Banking and Capital Markets Insurance IT, Commn & Entmt Emerging Industries Total Revenue by Project Type (%) TTM FPP Revenue by Delivery Location (%) Onsite Offshore Secondary Market Segment (%) HP Channel Mature Market - Direct Channel Emerging Market - Direct Channel Service Type (%) App Maintenance App Development Customer Service Service/Technical Help Desk Trasaction Processing Service Infra Management Services Knowledge Processes License Income CLIENT METRICS Client wins BCM Insurance ITCE Emerging industries Total Client wins Channels Direct Channel HP Channel Total Client additions Clients Contributing More than USD1m USD5m USD10m USD20m Clients - Direct Channel USD1m USD5m USD10m USD20m Clients - HP Channel USD1m USD5m USD10m USD20m Source: MOSL, Company 23 July

8 Financials and Valuations Key assumption E 2018E INR/USD Rate Revenues (USD m) 1,117 1,036 1, ,041 Total Delivery Headcount 40,408 36,640 37,052 35,663 34,059 22,324 22,006 24,006 Net Addition 446-3, ,389-1,604-11, ,000 Per Capita Productivity (USD) 27,646 28,284 27,655 28,717 27,716 41,465 42,189 43,381 HP Channel Revenue (%) Direct Channel Revenue (%) Income Statement (INR Million) Y/E Mar E 2018E Net Sales 50,980 53,574 57,963 25,939 57,949 60,879 62,129 71,897 Change (%) EBITDA 9,934 10,511 10,335 4,397 8,701 8,970 9,596 11,440 EBITDA Margin (%) Depreciation 1,550 1,745 1, EBIT 8,384 8,766 8,889 3,893 7,721 8,226 8,981 10,711 Interest Other Income 1,751 1,513 1, ,687 1,712 2,082 1,565 Extraordinary items PBT 10,135 10,279 9,951 4,282 9,408 9,938 11,063 12,276 Tax 1,827 2,357 2,514 1,191 2,630 2,696 3,068 3,376 Tax Rate (%) Min. Int. & Assoc. Share Reported PAT 8,308 7,922 7,437 3,091 6,778 7,242 7,995 8,900 Adjusted PAT 8,308 7,922 7,437 3,091 6,778 7,242 7,995 8,900 Change (%) Balance Sheet (INR Million) Y/E Mar E 2018E Share Capital 2,100 2,101 2,101 2,101 2,101 2,102 2,102 2,102 Reserves 36,898 41,946 47,243 49,049 52,697 60,828 59,757 63,119 Net Worth 38,998 44,047 49,344 51,150 54,798 62,930 61,859 65,221 Debt 2,946 3,299 5,600 5,555 6,253 5,338 3,045 2,045 Deferred Tax ,015-1, Total Capital Employed 40,969 46,331 53,929 55,737 60,225 67,327 64,180 66,542 Gross Fixed Assets 11,339 11,401 10,892 10,912 10,055 9,300 11,060 13,180 Less: Acc Depreciation 8,495 9,041 8,770 8,734 8,499 8,128 8,746 9,475 Net Fixed Assets 2,844 2,360 2,122 2,178 1,556 1,172 2,314 3,705 Capital WIP ,103 1,103 Investments 17,765 25,192 18,995 18,154 14,431 21,118 23,456 23,456 Current Assets 25,610 22,970 26,060 26,522 35,014 31,968 25,406 28,683 Inventory Debtors 13,072 12,102 12,582 12,967 11,371 12,333 13,600 15,826 Cash & Bank 2,897 4,216 5,943 4,700 13,311 8,783 1,571 2,622 Loans & Adv, Others 9,641 6,652 7,535 8,855 10,332 10,852 10,235 10,235 Curr Liabs & Provns 14,050 13,953 16,013 13,044 12,875 10,826 11,593 13,898 Curr. Liabilities 9,098 8,765 10,167 9,446 7,145 8,681 9,489 11,042 Provisions 4,952 5,188 5,846 3,598 5,730 2,145 2,104 2,856 Net Current Assets 11,560 9,017 10,047 13,478 22,139 21,142 13,813 14,785 Total Assets 40,969 46,331 53,929 55,737 60,225 67,327 64,180 66, July

9 Financials and Valuations Ratios Y/E Mar E 2018E Basic (INR) EPS Cash EPS Book Value DPS Payout (incl. Div. Tax.) Valuation(x) P/E Cash P/E Price / Book Value EV/Sales EV/EBITDA Dividend Yield (%) Profitability Ratios (%) RoE RoCE RoIC Turnover Ratios (%) Fixed Asset Turnover (x) Debtors (No. of Days) Leverage Ratios (%) Net Debt/Equity (x) Cash Flow Statement (INR Million) Y/E Mar E 2018E Adjusted EBITDA 9,934 10,511 10,335 4,397 8,701 8,970 9,596 11,440 Non cash opr. exp (inc) 1,751 1,513 1, ,687 1,712 2,082 1,565 (Inc)/Dec in Wkg. Cap. 1,247 3, , , Tax Paid -1,827-2,357-2,514-1,191-2,630-2,696-3,068-3,376 Other operating activities CF from Op. Activity 10,884 13,489 9,580-1,032 7,850 4,340 8,944 9,709 (Inc)/Dec in FA & CWIP -1,985-1,309-1, ,908-2,120 Free cash flows 8,899 12,180 8,256-1,388 7,236 3,345 7,036 7,589 (Pur)/Sale of Invt -3,165-7,427 6, ,723-6,687-2,338 0 Others -4, , , CF from Inv. Activity -9,961-9,650-8,014 1,119 3,193-8,843-4,797-2,120 Inc/(Dec) in Net Worth ,307 2, Inc / (Dec) in Debt 2, , ,293-1,000 Interest Paid Divd Paid (incl Tax) & Others -1,598-4,180-4,180-1,721-4, ,314-5,538 CF from Fin. Activity 188-2, ,330-2, ,360-6,538 Inc/(Dec) in Cash 1,111 1,319 1,727-1,243 8,611-4,529-7,213 1,050 Add: Opening Balance 1,786 2,897 4,216 5,943 4,700 13,310 8,782 1,569 Closing Balance 2,897 4,216 5,943 4,700 13,311 8,782 1,569 2, July

10 Corporate profile Company description MphasiS, an HP-EDS company is amongst the top IT service providers from India. It has a balanced mix of Application and BPO businesses, with good growth in ITO business, and support of its US-based parent, HP-EDS. Mphasis employs over 35,900 people. Exhibit 1: Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Mar-15 Promoter DII FII Others Note: FII Includes depository receipts Source: Capitaline Exhibit 3: Top holders Holder Name % Holding ABERDEEN GLOBAL INDIAN EQUITY LIMITED 4.9 BAJAJ ALLIANZ LIFE INSURANCE COMPANY LTD. 1.9 LIC OF INDIA MARKET PLUS 1 GROWTH FUND 1.6 ABERDEEN GLOBAL-ASIAN SMALLER COMPANIES FUND 1.5 ICICI PRUDENTIAL LIFE INSURANCE COMPANY 1.4 Source: Capitaline Exhibit 4: Top management Name Designation Exhibit 5: Directors Name Name D S Brar Chairman Lakshmikanth K Ananth Narayanan Kumar James Mark Merritt Vice Chairman Jan Kathleen Hier Jeff Thomas Balu Ganesh Ayyar Chief Executive Officer Mary Teresa Hassett Stefan Antonio Lutz A Sivaram Nair Company Secretary Source: Capitaline *Independent Exhibit 6: Auditors Name S R Batliboi & Associates LLP Type Statutory Exhibit 7: MOSL forecast v/s consensus EPS MOSL Consensus (INR) forecast forecast Variation (%) FY FY Source: Capitaline Source: Bloomberg 23 July

11 N O T E S 23 July

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