Mphasis growth visibility strengthens as large deals and AI pipeline ramp

Investment View and Valuation

In its July 24, 2026 results update, Motilal Oswal Financial Services Ltd. retained its Buy rating on Mphasis, citing improving near-term growth visibility from large-deal ramp-ups and a strengthening AI-led pipeline. The broker expects 2QFY27 to deliver Mphasis's strongest sequential constant-currency growth in three years.

Motilal Oswal values Mphasis at 21 times FY28E EPS and retains a target price of Rs 2,700. The broker forecasts a USD revenue CAGR of about 10 per cent and an adjusted PAT CAGR of about 14 per cent over FY26-28E. Execution of recently won deals remains the principal monitorable.

1QFY27 Operating Performance

Mphasis reported 1QFY27 revenue of USD 471 million, up 2.1 per cent quarter on quarter in constant currency and broadly in line with Motilal Oswal's 2 per cent estimate. Direct revenue rose 2.2 per cent sequentially and 9.9 per cent year on year in constant currency. Revenue in rupee terms was Rs 43,841 million, up 17.5 per cent year on year.

TMT and other verticals led sequential growth, whereas logistics and transportation declined. BFSI was broadly flat during the quarter. The company closed three large deals in 1QFY27, including one exceeding USD 100 million, and total contract value was USD 461 million. About 63 per cent of deal wins were in NextGen Services.

Margin Pressure and Capacity Indicators

Profitability missed the broker's expectations. EBIT margin fell 60 basis points sequentially and 50 basis points year on year to 14.8 per cent, versus Motilal Oswal's 15.5 per cent estimate. Adjusted PAT was Rs 4,895 million, down 4 per cent quarter on quarter and below the broker's Rs 5,406 million estimate.

Margin pressure reflected the costs of ramping new deals, acquisition-related expenses and proactive hiring ahead of anticipated growth. Offshore utilisation excluding trainees declined 300 basis points sequentially to 81 per cent, while net headcount increased 3 per cent to 32,097.

FY27 Guidance and AI-Led Pipeline

Management retained its FY27 guidance for high-single-digit to low-double-digit constant-currency revenue growth, sustainable EBIT margin of 14.75-15.75 per cent, and operating cash flow conversion of about 80 per cent of net income. Management expects utilisation to improve as recently won projects scale.

The Red Oak vendor-consolidation deal is expected to be consummated around end-August or early September, with only a partial 2QFY27 contribution. The deal is already included in guidance.

The pipeline reached an all-time high in 1QFY27, having grown 2.8 times since the mphasis.ai launch. AI-related opportunities account for about 70 per cent of the pipeline, versus 12 per cent previously.

Working Capital and Cash Conversion

Motilal Oswal notes that working capital and cash conversion remain below historical levels because large managed-services, outcome-based and vendor-consolidation contracts require upfront investment. Contract-acquisition costs and customer-related intangibles are recognised early, while cash recovery occurs over the contract life.

Days sales outstanding were elevated at 95 days, though management expects gradual improvement. The broker expects free cash flow conversion to improve from FY28 as older deals mature and recoveries offset spending on new wins.

Earnings Estimate Revisions

The broker expects platform-led offerings and higher AI attachment to support gross margin. However, it believes much of the operating leverage will be reinvested in delivery capabilities, platforms and go-to-market initiatives, keeping margins broadly range-bound.

Key Risks

• Macroeconomic uncertainty and client caution.
• Geopolitical disruption and AI-related disruption fears.
• Continued pressure in logistics and transportation.
• Elevated working capital requirements.
• Weaker-than-expected execution or ramp-up of large deal wins.