Mphasis Ltd:Annual Report 2023-24 Analysis

Mphasis Ltd.: A Comprehensive Overview #

About the Company #

Year of Establishment and Founding History:

Mphasis was formed in June 2000 through the merger of the US-based IT consulting company Mphasis Corporation and the Indian IT services company BFL Software Limited. BFL Software was founded earlier in 1992.

Headquarters Location and Global Presence:

• Headquarters: Bangalore, India.
• Global Presence: Mphasis has a significant global presence with offices and development centers across North America, Europe, Asia Pacific, and Australia. They operate in various countries including the United States, United Kingdom, Netherlands, Singapore, and Australia.

Company Vision and Mission:

Mphasis’ vision and mission are centered around driving digital transformation for their clients. While specific statements might evolve, generally, they aim to be a leading provider of technology solutions and services, enabling clients to achieve superior business outcomes through innovation and agility.

Key Milestones in their Growth Journey:

• 2000: Merger of Mphasis Corporation and BFL Software Limited.
• 2006: EDS acquired a majority stake in Mphasis.
• 2009: Hewlett-Packard (HP) acquired EDS, bringing Mphasis under the HP umbrella.
• 2016: Blackstone acquired a majority stake in Mphasis from HP.
• 2021: Blackstone increases its stake in Mphasis.

Stock Exchange Listing Details and Market Capitalization:

• Listed on: National Stock Exchange of India (NSE) and Bombay Stock Exchange (BSE).
• Market Capitalization: Actual market cap fluctuates, reference a financial portal for the latest value.

Recent Financial Performance Highlights:

To analyze the recent financial performance, check the latest annual reports, quarterly earnings reports, and investor presentations of Mphasis. Look for key metrics such as revenue growth, net profit, earnings per share (EPS), and operating margins.

Management Team and Leadership Structure:

• Reference Mphasis official website for the current executive leadership team.

Notable Awards or Recognitions:

Mphasis receives various industry recognitions and awards for its services, innovation, and workplace practices. Refer to the company’s website and press releases for the latest awards.

Their Products: #

Complete Product Portfolio with Categories:

Mphasis offers a wide range of IT services and solutions across various categories:

• Application Services: Application development, maintenance, and support.
• Infrastructure Services: Cloud services, data center management, network services.
• Business Process Services: Digital process automation, customer service, finance and accounting.
• Digital Solutions: Digital transformation consulting, data analytics, AI, and IoT solutions.
• Security Services: Cybersecurity consulting and solutions.
• Cloud Services: Cloud migration, cloud management, and cloud native development.

Flagship or Signature Product Lines:

• Autosensus: Platform for data-driven decision making in the insurance industry.
• NextAngles: A platform for regulatory compliance and risk management.

Key Technological Innovations or Patents:

Mphasis focuses on innovation in areas like AI, machine learning, cloud computing, and blockchain. Information about specific patents needs to be retrieved directly from the Mphasis website or relevant patent databases.

Quality Certifications and Standards:

Mphasis maintains various quality certifications and standards to ensure the quality and security of its services. These may include:

• ISO 9001 (Quality Management)
• ISO 27001 (Information Security Management)
• SOC 2 Compliance
• CMMI (Capability Maturity Model Integration)

Any Unique Selling Propositions or Technological Advantages:

Mphasis’ USPs include:

• Deep domain expertise in specific industries (e.g., banking, insurance, healthcare).
• Strong focus on digital transformation and emerging technologies.
• Emphasis on customer-centricity and delivering measurable business outcomes.
• Investments in automation and AI-powered solutions.

Recent Product Launches or R&D Initiatives:

Refer to Mphasis press releases and announcements for the latest product launches and R&D initiatives.

Primary Customers: #

Target Industries and Sectors:

Mphasis serves clients across various industries, including:

• Banking and Financial Services
• Insurance
• Healthcare
• Telecom
• Logistics
• Manufacturing

Geographic Markets (domestic vs. international):

Mphasis has a strong presence in both domestic and international markets. The company derives a significant portion of its revenue from North America and Europe, but also caters to the Indian market.

Major Competitors: #

Direct Competitors in India and Globally:

Mphasis competes with other IT services companies, including:

• Tata Consultancy Services (TCS)
• Infosys
• Wipro
• HCL Technologies
• Tech Mahindra
• Cognizant
• Accenture

Competitive Advantages and Disadvantages:

• Advantages: Strong domain expertise, focus on digital transformation, customer-centric approach.
• Disadvantages: Smaller scale compared to larger competitors, potential dependence on key clients.

How They Differentiate from Competitors:

Mphasis differentiates itself through its specialization in certain industries, its focus on emerging technologies, and its emphasis on delivering measurable business outcomes.

Market Positioning Strategy:

Mphasis positions itself as a strategic partner for clients seeking to transform their businesses through digital technologies. They aim to be a leader in providing innovative solutions and services that drive business value.

Future Outlook: #

Expansion Plans or Growth Strategy:

Mphasis’ growth strategy involves expanding its presence in key markets, investing in emerging technologies, and acquiring companies with complementary capabilities.

Sustainability Initiatives or ESG Commitments:

Check Mphasis website and reports for their current sustainability initiatives.

Industry Trends Affecting Their Business:

Key industry trends include:

• Increasing demand for digital transformation services.
• Rapid adoption of cloud computing.
• Growing importance of cybersecurity.
• Rise of artificial intelligence and automation.

Long-Term Vision and Strategic Goals:

Mphasis aims to be a leading provider of digital transformation services, enabling clients to achieve superior business outcomes through innovation and agility. Their strategic goals likely include expanding their market share, increasing profitability, and enhancing their brand reputation.

Comprehensive Performance Overview #

3-Year Trend Analysis of Key Financial Metrics #

• Net Revenue: Decreased by 3.8% year-over-year (YoY) in FY24, amounting to ₹132,785 million. On a constant currency basis, the decline was 6.6%.
• Gross Revenue: Declined by 3.7% in FY24, reaching ₹133,340 million.
• Direct Revenue: Showed a decrease of 2.3% on a reported basis and a 5.2% decline in constant currency, totaling ₹126,938 million in FY24.
• Profit Before Tax (PBT): Declined by 4.8% in FY24, totaling ₹20,683.22 million.
• Profit for the year: Decreased by 5.1%, from ₹16,379.22 in FY23 to ₹15,548.20.
• Total Comprehensive income for the year: Showed a minor decline of 0.97% for a total amount of ₹16,843.49.
• Basic Earning per Equity Share: Decreased from 87.05 to 82.42.
• DXC Revenue: Showed a significant decline of 32.2% in FY24, amounting to ₹4,205 million, constituting only 3.2% of gross revenue.
• Operating Profit: Decreased by 4.6% in FY24.
• Gross Profit: Declined 1.8% in FY24.
• Operating Profit Margin: Slight decrease from 15.3% in FY23 to 15.1% in FY24.
• Net Profit Margin: Showed a slight decrease from 11.9% in FY23 to 11.7% in FY24.

Business Segment Performance #

• Banking and Financial Services: Revenue declined by 13.3% in FY24, due to weaknesses in the mortgage segment.
• Logistics and Transportation: Relatively flat revenue, minor decline.
• Technology, Media, and Telecom (TMT): Showed strong growth, contributing to an increased share of 52% of revenue from emerging verticals (up from 49% in the previous year).
• Insurance: Moderate growth.
• Others: Showed revenue increase for a combined share of 52% from the emerging verticals.

Major Strategic Initiatives and Their Progress #

• Client Diversification: Achieved a 13% revenue increase in ‘Beyond Top 10’ clients, and a 73% increase in large deal wins in FY24 over FY23.
• Expansion into Emerging Verticals: Increased revenue share from emerging verticals (Healthcare, Insurance, TMT, Logistics and Transportation) to 52% from 49% in the previous year.
• Geographic Expansion: 42% YoY revenue increase in FY24 from diversified clientele across verticals. Intensified operations in Canada and invested in Riyadh, Taiwan, Mexico, Poland and Costa Rica.
• AI Integration: Launched the Mphasis Gen AI Foundry with AWS and DeepInsights™ Doc AI. Formed strategic partnerships with companies like Kore.ai, WorkFusion, and CoreStack.
• Talent Development: Revitalized leadership in core geos, verticals, and technologies, and evolved the ‘Talent Next’ platform.
• Inorganic growth: Acquired Silverline, a Salesforce partner, and BlinkUX, enhancing capabilities in customer experience and conversational AI.

Risk Landscape Changes #

• Geopolitical Risks: Increased risks due to global tensions (Russia-Ukraine War, Hamas-Israel war, Red Sea attacks) are being monitored.
• Technology Obsolescence: Continuous investment in R&D and strategic partnerships to stay ahead of technological advancements.
• Business Concentration: Mitigating reliance on a few key clients by diversifying its client base, with a strategy targeting faster growth in ‘Focus 20’ and ‘Next 30’ accounts.
• Inflation and Interest Rates: Focusing on client diversification and wallet share improvement to counter adverse effects.
• Cybersecurity: Continued strengthening of IT security frameworks (ISO 27001, PCI DSS) and cybersecurity strategies.

ESG Initiatives and Metrics #

• High ESG Industry Ratings: Achieved a S&P Global ESG Score of 64/100, CRISIL Sustainability Report rating of ‘Strong’ with a score of 63, and a Bronze medal (54/100) in the 2023 EcoVadis Sustainability Rating.
• CSR Activities: Through the Mphasis F1 Foundation, investments were made in education, livelihood, inclusion, and environmental sustainability, partnering with various organizations.
• Diversity, Equity & Inclusion: Signed the UN Women’s Empowerment Principles and introduced a DEI dashboard.

Management Outlook #

• Management’s outlook is optimistic about future opportunities, with a strong pipeline of large deals focused on digital transformation and legacy modernization.
• AI adoption is expected to drive acceleration and greater success for organizations.
• The commitment to innovation, collaboration, sustainability, and social good will continue.
• Mphasis has emphasized a strategic focus on cost reduction and transformation.

Detailed Analysis #

Financial Position Analysis #

Balance Sheet Analysis #

3-Year Comparative Analysis of Assets, Liabilities, and Equity (Standalone) #

(₹ million)

Significant Changes in Major Line Items (>10% YoY) #

• Current Investments: Increased significantly from ₹6,298.94 million in FY23 to ₹18,105.30 million in FY24, a growth of 187.4%.
• Loans(Current): Decreased significantly from 1,640.84 million in FY23 to 240.04 million in FY24, a decrease of 85.37%.
• Other Assets (Current): Decreased from ₹6,923.49 million in FY23 to ₹4,073.59 million in FY24, a decline of 41.16%.
• Deferred Tax Assets (Net): Decreased from ₹1,602.36 million in FY23 to ₹833.17 million in FY24, a decline of 48.00%.
• Other financial liabilities (Non-current): decreased from 326.35 million to 60.46, a decline of 81.47%.
• Borrowings (Current): Decreased from ₹1,014.04 million in FY23 to Nil in FY24.
• Other equity: Increased from 48,202.89 to 55,319.71, growth of 14.76%

Working Capital Trends #

• Working capital has shown a significant improvement, increasing by 25.94%, primarily driven by the reduction of current liabilities and increase in current investments.

Asset Quality Metrics #

• Allowance for Doubtful Receivables: Increased for trade receivables, indicating a slight potential worsening in the collectibility of receivables.

Debt Structure and Maturity Profile #

• The company had no outstanding Borrowings at the end of FY24
• Lease liabilities are split between non-current and current.

Off-Balance Sheet Items #

• Contingent Liabilities: Claims against the Company not acknowledged as debts (primarily related to direct and indirect tax matters) amount to ₹18,290.88 million as of 31 March 2024. There are also other claims amounting to ’ 741.90.
• Bank Guarantees: The Company has outstanding bank guarantees of ₹186.88 million.
• Financial Guarantee given on behalf of the wholly owned subsidiary for 4,170.25.
• Letters of Comfort: Provided to banks for credit facilities availed by a wholly-owned subsidiary.

Mphasis Limited Financial Analysis - FY24 #

Revenue Breakdown by Segment/Geography with Growth Rates #

• Banking and Financial Services: FY24 revenue was ₹63,422.98 million, a decline of 13.3% from FY23.
• Logistics and Transportation: FY24 revenue was ₹18,286.73 million, a decline of 0.7% from FY23
• Technology, Media, and Telecom: FY24 revenue was ₹21,297.61 million, a growth of 9.5% over FY23.
• Insurance: FY24 revenue was ₹14,569.86 million, growth of 4.0% over FY23.
• Others: FY24 revenue was ₹15,762.87 million, growth of 17.8% from FY23
• Americas: FY24 revenue was ₹107,167.26 million, a 5.3% decline from FY23.
• India: FY24 revenue was ₹7,487.38 million, a 5.7% growth from FY23.
• EMEA: FY24 revenue was ₹14,996.12 million, a 7.4% growth from FY23.
• ROW: FY24 revenue was ₹3,689.29 million, a 11.7% decline from FY23.
• Direct Channel: Revenue declined by 2.3% year-over-year.
• DXC Channel: Revenue declined by 32.2% year-over-year.
• Application Services: FY 24 revenue was 94,454.90 a decline of 0.3%.
• Business Process Services: FY 24 revenue was 22,075.04, a decline of 17.2%
• Infrastructure Services: FY24 was 16,810.11, a decline of 1.5%.
• Onsite: FY24 71,160.44, a decline of 8.1%
• Offshore: FY24 62,179.61, a growth of 1.96%
• Time and Material: FY24 77,666.84, a decline of 0.4%
• Transaction Based: FY24 13,578.61, a decline of 26.5%.
• Fixed Price: FY24 42,095.60 a growth of 0.3%.
• Direct: FY24 1,26,937.67, a decline of 2.3%
• DXC: FY24 4,204.65, a decline of 32.2%
• Others: FY24 2,197.73, a decline of 4.6%.

Cost Structure Analysis #

• Employee Benefits Expense: Constituted the largest expense at ₹79,253.27 million in FY24, representing 69.5% of total expenses.
• Other Expenses: The second largest expense category at ₹29,313.04 million in FY24, including items like subcontracting, legal and professional charges, and software support.
• Cost of Revenue represented 72.3% of net revenue.
• Selling Expenses represented 7.0% of net revenues.
• General and Administrative expenses were 5.6% of net revenues.

Margin Analysis (Gross, Operating, Net) with Trends #

• Gross Margin: Increased to 27.7% in FY24 from 27.2% in FY23.
• Operating Margin: Decreased to 15.1% in FY24 from 15.3% in FY23.
• Net Margin: 11.7% in FY24 vs. 11.9% in FY23.

Non-Recurring Items #

• Gain on reversal of contingent consideration of ’ 2,004.82 in Consolidated Statement of Profit and Loss.

EPS Analysis (Basic/Diluted) #

• Basic EPS: Decreased to ₹82.42 in FY24 from ₹87.05 in FY23.
• Diluted EPS: Decreased to ₹81.83 in FY24 from ₹86.37 in FY23.

Future Projections and Guidance #

Management Guidance and Assumptions #

• Management’s strategy focuses on profound impact on clients’ technology landscape.
• Management’s client diversification strategy includes targeting faster growth in “Focus 20” and “Next 30” accounts compared to the top 10 accounts.
• Management assumes that the fair value adjustments determined provisionally for business combinations that arose on the acquisition date would be the same if the acquisitions had occurred at the beginning of the reporting period.
• The discount rate used, in impairment testing, by the management for CGUs is based on the historical market return of comparable companies.

Market Growth Forecasts #

• Gartner estimates that IT services will continue to see an increase in growth in 2024, becoming the largest segment of IT spending for the first time.

Planned Strategic Initiatives #

• Significant investment in New Client Acquisitions.
• Continued investment in technology and R&D, fostering a culture of innovation and strategic partnerships.
• Focus on proactive deal wins to build in-house client capabilities.
• Continued investment in the partnership with hyperscalers like AWS, Azure, and Google.
• Strategic collaboration with AWS to deploy Generative AI in Financial Services.
• Implementation of robust business continuity plans and investment in disaster recovery infrastructure.
• Detailed post-merger integration strategies for operational streamlining and synergy realization.
• Leveraging nearshore centers and offshore delivery to reduce work visa dependency.
• Sustained investments in renewable energy and carbon reduction initiatives.

Capital Expenditure Plans #

• Planned use of Special Economic Zone Re-investment Reserve for acquiring eligible plant and machinery.
• Commitment to invest in mitigation of physical risk exposures through infrastructure upgrades or location diversification.

Efficiency Improvement Targets #

• Modernization of core cards platform to a BIAN-based composable architecture with >40% efficiency in the overall transformation program.
• Transformation of IT operations with 25-35% auto-resolution of tickets, 30% TCO reduction, and enhanced user experience, via service desk automation.
• Contact center transformation targeting 30% TCO reduction and 10% improvement in SLAs.
• Business process transformation with Gen AI-based claim eligibility determination, claim validation, and human-assisted claim adjudication, targeting 85% efficiency gains.
• AI-led relearning and code generation solutions, targeting >40% efficiency in a legacy modernization program.
• Gen AI-enabled regression optimization, quality control, and test case self-healing in zero QA, targeting >40% productivity gain across enterprise quality assurance and testing.
• Acceleration of the software development life cycle will be achieved by the hybrid multi-cloud operating platform that will leverage Google’s Gemini Code Assist.

Potential Challenges and Opportunities #

Challenges #

• Heightened geopolitical tensions and disputes could disrupt global operations and supply chains.
• Rapid technological advancements may render existing solutions obsolete, affecting competitiveness.
• Dependency on a few key clients or markets exposes the Company to revenue volatility.
• Sustained high inflation and interest rates pose a significant threat to the US mortgage loan processing business.
• Legislative changes limiting the availability of work visas can potentially impact outsourcing.
• Evolving regulatory landscapes pose compliance challenges.

Opportunities #

• Collaboration with clients to build in-house capabilities and assist in their operations (addressing competition risks).
• Strategic partnerships with AWS, Microsoft and Google, and specialist players like Kore.ai and WorkFusion to develop capabilities.
• Leveraging nearshore centers and offshore delivery.
• Investing in mitigation of physical risk exposures.
• Active contribution to the environment through CSR activities.

Scenario Analysis and Sensitivity to Key Assumptions #

• Geopolitical Tensions: The current geopolitical scenarios could impact the business. However, the company states that their is no direct impact on business.
• Interest Rate Risk: A change of 100 basis points in interest rates would impact profit after tax by approximately ₹89.76 million (FY23: ₹18.59 million), assuming other variables remain constant.
• Foreign Currency Exchange Rate Risk: For every 1% appreciation/depreciation of respective foreign currencies, profit before taxes will be impacted by approximately ₹14.47 million (FY23: ₹11.04 million).
• Goodwill Impairment: The provided data indicate that management believes any reasonably possible change in key assumptions used in impairment testing (revenue growth, operating margins, terminal growth, discount rates) would not cause the carrying amount of CGUs to exceed their recoverable amount.
• Expected Credit Loss (ECL): ECL are messured at the 12-month or lifetime, based on credith risk on finacial assets.

Audit and Regulatory Analysis of Mphasis Limited #

Auditor’s Opinion and Qualifications #

• The auditors, B S R & Co. LLp, issued an unmodified (clean) opinion on both the consolidated and standalone financial statements.
• The auditor’s report related to subsidiary companies incorporated in India, were unissued by respective auditors.
• Audit trail software was available and operational for all relevant transaction except in an instance of accounting softwares relating to certain processes, operated by third party software provider.

Key Accounting Policies #

• Financial statements are prepared under the historical cost convention and accrual basis of accounting, with exceptions for certain financial instruments measured at fair value.
• The Company uses Indian Accounting Standards (Ind AS) as specified under Section 133 of the Companies Act, 2013.
• Revenue recognition policies vary based on contract type (time-and-material, fixed-price, unit-priced, milestone-based) and use the percentage-of-completion method for fixed-price contracts.
• Business combinations are accounted for using the acquisition method. Goodwill is tested annually for impairment.
• Property, plant, and equipment are depreciated using the straight-line method, with useful lives estimated by management that sometimes differ from Schedule II of the Companies Act, 2013.
• Leases are recognized as right-of-use assets and corresponding lease liabilities, with exemptions for short-term and low-value leases.
• Impairment testing is performed for both financial and non-financial assets, including goodwill.
• Employee benefits, including compensated absences, defined contribution plans, and defined benefit plans (like gratuity), are accounted for in accordance with Ind AS.
• Share-based payments are measured using the fair value method under Ind AS 102.
• Foreign currency transactions are recorded at prevailing exchange rates, and monetary assets/liabilities are restated at balance sheet date rates.
• Income tax expense includes current and deferred tax. Deferred tax is recognized on temporary differences.

Internal Control Effectiveness #

• The auditors issued an unmodified opinion on the Company’s internal financial controls over financial reporting.
• Company claims to have robust project management practices.
• The Company has implemented a comprehensive Fraud Risk Management System.

Regulatory Compliance Status #

• The Company has generally complied with statutory provisions and regulations, including the Companies Act, 2013, SEBI regulations, and other applicable laws.
• The Company has complied with Secretarial Standards.
• There are no pending proceedings against the Company for holding benami property.
• No material fraud by the Company or on the Company was reported during the audit.
• The Company has complied with Section 177 and 188 of Companies Act, 2013 with respect to related party transactions.
• There was no default in repayment of borrowings.
• The Company has a well established hedging policy and no long term contracts with material forseeable losses.
• The Company is compliant with provisions of Foreign Exchange Management Act, 1999, SEBI act and other statutory requirements.

Legal Proceedings and Potential Impact #

• The Company is involved in ongoing disputes with income tax authorities in India and other jurisdictions.
• Claims not acknowledged as debts related to direct taxes and transfer pricing amount to ₹18,290.88 million.
• Claims related to indirect tax matters not acknowledged as debts amount to ₹206.47 million.
• Bank guarantees amounting to ₹5,637.21 million have been furnished for tax demands.
• The Company has also received additional notices/inquires from tax authorities.

Related Party Transactions #

• Transactions with related parties were conducted in the ordinary course of business and at arm’s length.
• Key related parties include holding companies, subsidiaries, post-employment benefit trusts, and Key Management Personnel (KMP).
• Material transactions were with subsidiaries, in rendering IT services, sublease payments and Inter Corporate Deposits.
• No loans, guarantees, or investments were deemed prejudicial to the Company’s interest.
• Remuneration was paid to KMPs and directors, as per the Remuneration Policy and within the limits of Section 197 of the Companies Act, 2013.
• All related party transactions have been approved by the Board.

Subsequent Events #

• The Board of Directors proposed a final dividend of ₹55 per equity share for the year ended 31 March 2024, subject to shareholder approval.
• The Board, based on the recommendations of Nomination and Remuneration Committee and the ESOP Compensation Committee, approved extending cashless facility at the time of exercise of stock options.

Accounting Quality and Regulatory Risk Assessment #

• Accounting Quality: The use of Ind AS, consistent application of accounting policies, and an unmodified audit opinion suggest a relatively high degree of accounting quality. The use of estimates and judgments is inherent in financial reporting, but these are subject to audit scrutiny.
• Regulatory Risk: The main area of regulatory risk lies in the ongoing tax disputes. The volume of related party transactions warrants monitoring of compliance with Section 188 of the Companies Act, 2013 and Regulation 23 of SEBI.