Expect 2021 tech spend growth to be in mid-single digits – Mphasis

Update on the Indian Equity Market:
On Tuesday, Nifty 50 ended at an all-time high of 13,933 (+0.4%), as gains in the banking, IT, and Technology sectors propelled the index higher. Among the stocks, INDUSINDBK (+5.7%), TECHM (+2.2%), and AXISBANK (+2.1%) led the gainers while HINDALCO (-2.1%), NESTLEIND (-1.8%), and COALINDIA (-1.7%) led the laggards. PRIVATE BANK (+1.6%), BANK (+1.4%), and FINANCIAL SERVICES (+1.0%) led the sector gainers. MEDIA (-1.5%), METAL (-1.1%), and REALTY (-0.3%) led the sectoral losers.

Excerpts of an interview of Mr. Nitin Rakesh, CEO & Executive Director, Mphasis with CNBC TV18 on 29th December 2020:
• Mphasis has witnessed a good expansion of deal pipeline in the last 3-4 quarters but the type of deals is different. The conversation has been about transformation deals, and acceleration of the work done for clients, such as the adoption of application transformation, and moving work to the cloud.
• Their guidance for a pretty strong year in the direct business remains on track. There were 87% (in terms of Total Contract Value (TCV)) more deals done in 1HFY21 compared to 1HFY20. This is expected to translate nicely to the overall revenue momentum.
• The pipeline is pretty strong in terms of the size of deals, the number of deals, and the nature of deals are very encouraging.
• They are expanding their business in Europe, which was resilient to lockdowns in certain areas. Mr. Rakesh feels the impact of these lockdowns needs to be seen on the sales pipeline. In the short to medium term, he believes they are good to sustain through the lockdowns.
• The growth in the business has been broad-based. Hi-tech, banking, logistics – these segments have done well.
• He believes the recovery post the Covid-19 crisis will be different compared to the recoveries from the Y2K crisis and the global financial crisis. This is primarily due to shifting in consumption patterns from a technological standpoint, which will change the importance of technology in every business. Second, the type of competency and capability required is going to be different.
• The market opportunity will exist over the next 3 years. The total tech spend will go up probably higher than it has been in the last 3-5 years. The tech spends are expected to grow in mid-single digits in CY21.
• He believes Mphasis will see above-market growth.
• Mphasis has a pretty robust investment plan. There has been investment in two new tribes in the last six months- Experience and Everything as a platform. They are also investing ahead of the curve in areas such as Quantum Computing.
• The entire value chain that involves all things cloud, AI and machine learning will the areas where Mphasis will keep investing.

Consensus Estimate: (Source: market screener website)
• The closing price of Mphasis was ₹ 1,555/- as of 29-December-2020. It traded at 24x/ 20x/ 18x the consensus earnings estimate of ₹ 66/ 77 /87 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 1,569 implies a PE multiple of 18x on FY23E EPS of ₹ 87/-.

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