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Analysts cautious on growth from DXC for Mphasis

DXC has been streamlining its business by expanding its offshore presence, making analysts cautious about its dependency on Mphasis, with some pulling back expectations from the channel and others revising their estimates. Business from DXC accounts for up to 28% of revenue. Mphasis has been able to grow revenues from its ‘direct core’ segment.

, ET Bureau|
Dec 06, 2019, 07.51 PM IST
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IT-SERVICES---AGENCIES
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MUMBAI: IT services provider Mphasis, which gets more than a fourth of its revenues from DXC Technology, may see “risks” in its business from the US-based client amid the latter's plans to divest business units, changes in leadership and its acquisition of IT services company Virtual Clarity, analysts said.

DXC has been streamlining its business by cutting down on vendors and expanding its offshore presence, making analysts cautious about its dependency on Mphasis, with some pulling back expectations from the channel and others revising their estimates. Business from DXC accounts for up to 28% of Mphasis’ revenue.

Mphasis has, however, been able to grow revenues from its ‘direct core’ segment, which caters predominantly to sectors like banking, diversified financial services and insurance and accounts for 69% of its revenue.

The Mphasis management's commentary that it would only see average, industry-level growth (and not higher) from DXC has also helped set expectations, said Apurva Prasad, IT sector analyst at HDFC Securities.

“While we remain positive on direct core channel, we lower growth estimates for DXC-HP segment with increased risk around the new strategic roadmap for DXC,” Prasad said.

Following its second quarter results, Mphasis chief executive Nitin Rakesh told ET that the company may see moderation in growth momentum from DXC. The company is also expecting higher growth from new clients looking to sign 'digital' deals.

“We turn cautious on the stock given an uncertain HP/DXC business outlook and its diminishing margin of safety; since Q2FY17, Mphasis has already booked $906 mn (million) in revenue from the HP/DXC channel versus a minimum commitment of $990 mn over five years,” Ruchi Burdev, analyst at BoBCaps, the brokerage arm of Bank of Baroda, said in a note. The brokerage has lowered its rating of Mphasis' stock to ‘add’ from ‘buy’.

“Unfavourable changes in HP/DXC and Blackstone portfolio company relationships could pose downside risks to our estimates,” Burdev added.

Analysts have, however, indicated that DXC's acquisition of engineering services firm Luxoft earlier in the year may not reduce its dependency on Mphasis, as was earlier believed. DXC acquired the company for about $2 billion to strengthen its digital capabilities.

“Luxoft will help DXC to expand its footprint across Europe, where Mphasis doesn’t have strong operations…We believe DXC acquired Luxoft to gain an edge over competitors and not to cut down work for Mphasis,” said Princy Bhansali and Mohit Jain, analysts at brokerage firm Anand Rathi.
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