Blackstone mulls Mphasis exit as stock up 3x in 4 years

The world’s largest PE fund Blackstone is weighing its exit from Mphasis, the technology company it acquired from Hewlett Packard Enterprise in 2016, thereby paving the way for its biggest payday in India, according to multiple people aware. Blackstone has initiated discussions with at least three global investment banks JP Morgan, Morgan Stanley and Citi for a sell side advisory mandate while KPMG has already begun vendor diligence, added the sources mentioned above as the PE fund looks to leverage the rally in technology stocks as offshoring and digitisation of businesses gathered momentum during the ongoing pandemic. The Mphasis stock is up 45% in the last 1 year and 205% (3X) since Blackstone bought a controlling stake in the company in the summer 2016. Currently it owns 56.16% of the Bangalore based company. Earlier this April, it had bulked up its shareholding picking up an additional 4.01% stake after bringing down the stake to 52% in 2018. The current market cap of Mphasis is Rs 24,557.34 crore. At current market price, Blackstone’s stake alone would get valued at Rs 13,752 crore. A sale would also trigger an open offer for an additional 26% of the company which if successful, can lead to the acquirer controlling over 80% of the company in a deal that could potentially exceed $2 billion. However, these talks are premature in nature and may or may not lead to a transaction, warned the sources mentioned above. A formal sale process is also not yet being launched. The stock closed Friday at Rs 1,314 on the BSE, up 1%.79360400Blackstone didn’t respond to queries sent on Saturday. Mphasis spokesperson said, “As you are aware, as a policy, we do not respond to rumours and market speculation.”Analysts feel, this trade would primarily interest large buyout PE funds like Carlyle, KKR among others or their sponsors like CPPIB, ADIA, GIC and a handful of strategic IT services companies even though most European or American firms are usually averse to making large bets in listed Indian technology stocks. Blackstone had in 2016 trumped Apollo Global Management and Tech Mahindra to close its boldest India bet, till date. “In India I can only see an acquisitive player like Tech M that needs to ramp up its banking, financial services and insurance (BFSI) vertical as a potential suitor,” said an investment banker specialising in this space. “The Japanese players like NTT, Hitachi among others keep evaluating India assets but rarely do much even though they remain a mystery box. The European giants have done a slew of deals and several of their US counterprts like IBM are facing a strategy flux… Considering the large ticket size and the risk appetite of PEs, this will be a keenly watched one.” Rewarding Revenue GrowthThe public markets have handsomely rewarded Mphasis post the Blackstone takeover as the fund has catalysed a transformational story leveraging the company’s core BFSI strength – that still contributes over half of the total revenues -- to aggressively foray into new digital and cloud-based offerings. Its shares have outperformed the Nifty IT index that has year to date already risen 36.78% by by 4.22%.This digital segment is now called ‘new-gen services’, a catch-all term for services that have elements of cloud, AI, machine learning, automation, and related technologies. In 2016 it launched a product built by its first in-house start-up, NextAngles, in the area of regulatory compliance catering to financial enterprises and Last week it acquired London headquareted Datalytyx, a next generation data engineering and consultancy company.“The acquisition will strengthen Mphasis's Next-Gen Data GTM Strategy and provide partnership status with Snowflake and Talend for cloud-based data services,” feels Parag Gupta of Morgan Stanley.While Mphasis recorded its highest total contract value ever at $360 million in the second quarter of FY21, 73% of these contracts were in the new-generation services. Over the last 12 month period, the company has also closed billion dollars worth of deals and the management in a recent call highlighted that its pipeline was 75% higher than a year ago.Some though still remain sceptical about the quality of revenue in the new businesses. Globally high end digital companies attract gross margins of 35-40% while that of Mphasis largely hovers between 25-30% range.The most significant transition, however, has been its reduction of dependence on business from former parent and key customer Hewlett Packard Enterprise or HPE/DXC that currently contributes only 16% of total revenues, down from the earlier 26% in FY 2016. Correspondingly, businesses from ‘Direct Channel’ -- work from non HPE/DXC sources – have grown to 82% of total billings.Analysts are equally bullish on the recent turnaround of its BPO unit Digital Risk – that deals with mortgage automation and provides services like underwriting, diligence and compliance – on the back of a booming US housing mortgage market. “Mphasis has consistently performer on both revenue and margin performance. It also offers the highest free cash flow yield among tier 2 peers and is at significant discount to Mindtree and LTI despite better performance and higher revenue visibility,” argued Nitin Padmanabhan, tech analyst with Investec. “The beat on revenue was driven by direct business, led by a growth in banking and capital markets and BPO.”

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