'Perfect proxy for rate cut cycle': Mphasis shares up 4%, hit fresh 2-year high; Buy stock, says Nuvama 

Shares of IT player Mphasis Ltd climbed 4 per cent in Thursday's trade to hit a fresh two-year high. If one were to go by Nuvama, the stock could be a perfect proxy for playing the interest rate cut cycle in the US, along with the recovery in the banking and financial services (BFS) segment. While upgrading the stock to 'Buy' from Hold' earlier, Nuvama said Mphasis can be ahead of peers in terms of capturing Gen-AI driven opportunities.

Nuvama met with Mphasis CEO Nitin Rakesh, CEO of Mphasis, who highlighted how Mphasis is taking giant strides to capture early-mover advantage in AI space. All along, its client-focused strategy has helped it to mine its clientele deeper along with diversifying the revenue base, Nuvama said.

Mphasis shares have rallied 25 per cent in the last three months, fuelled by expectations of interest rate cuts in US and early signs of a recovery in US-BFS. 

"We see Mphasis at an inflection point – where the factors that led to its underperformance over the last two years – are now likely to reverse, leading to outperformance. We are upgrading FY25E/26E EPS by 2 per cent/4 per cent and target valuation to 30x Sep-26 PE (from 27 times) – on better growth visibility," Nuvama said. The brokerage has a target price of Rs 3,500 on the stock. 

To be sure, Mphasis has had two lacklustre years – with 7.8 per cent growth in topline in FY23 and a degrowth of 6.3 per cent in sales in FY24. In FY25 too, it is likely to report mere mid single-digit growth. 

"The high interest-rate regime has hurt its two businesses – BFS (47 per cent of revenue) and mortgage (6 per cent of revenue). However, US macro is now showing signs of becoming favourable for the Indian IT industry. Mphasis’s mortgage business has a perfect inverse correlation with interest rates, and should recover as sharply as it had fallen, once the Fed enters the interest rate cut territory," Nuvama said. 

Nuvama said Mphasis’ remaining businesses have continued to remain strong all along the last two years’ underperformance, and grown in line with peers. 

The company has backfilled the entire DXC channel with growth in other verticals and clients – and it now contributes only 3 per cent to the top line (from 28 per cent in FY19) – making it completely irrelevant. 

As Mphasis continues to execute its client-focused strategy, the revenue base shall further diversify over the next few years, Nuvama said.

"Interest rate cuts are also likely to lead to a revival in tech spending by US corporates, which they had put on hold for almost two years now. The same is also corroborated by the commentary from various companies and clients – as they called out early signs of a recovery in US-BFS. Mphasis’s top client too is a BFS corporate, and recently announced historically high tech spends for CY24. A reversal of these factors – interest rates and BFS spending – shall boost growth for Mphasis ahead of peers," it said.

Mphasis shares climbed 3.84 per cent to hit a high of Rs 3,152.30 on BSE. Nuvama's target of Rs 3,500 suggests 11 per cent upside over the prevailing stock price.