Mindtree vs Mphasis: Which IT Stock is Better?

The Indian IT industry is one of the leading destinations in the world for the services sourcing business. According to the India Brand Equity Foundation (IBEF) report, it accounts for approximately 55% of the global IT services industry market share.

Every industry today ranging from retail to BFSI (banking, financial services, and insurance) wants to digitise its core.

Digitisation, an inevitable and perhaps a far better way to secure our future, not only boosts customer satisfaction but also enhances efficiency by lowering costs.

As this technological evolution advances, established IT (Information Technology) companies stand to benefit the most. This puts India, which is at the helm of information technology, in a sweet spot.

In today's article, we compare two players from the Indian IT industry that are riding this digitisation trend - Mphasis and Mindtree.

Background

Mindtree

A Larsen and Toubro group company now, Mindtree was created in 1999 by ten industry professionals from Cambridge Technology Partners, Lucent Technologies, and Wipro.

It offers product engineering services such as application development and maintenance and business process management (BPOs).

The company also run 42 offices across 24 countries servicing the BFSI, retail consumer products, and manufacturing sectors.

Mphasis

A global information technology services company, Mphasis also specialises in similar fields of application development and maintenance services, along with infrastructure outsourcing services, and business process outsourcing (BPOs) solutions.

The company's core servicing sectors include BFSI, technology and media, and logistics and transportation.

Once a Hewlett Packard Enterprise subsidiary, 56% the company's stake is now held by the famed global private equity major Blackstone Plc.

Revenue growth

An important indicator, past revenue growth can help you analyse the potential of a business.

Despite the disparity in the size of the business, the companies have clocked in a CAGR of 14.5% over the last five years.

Mindtree vs Mphasis Revenue Growth (2018-2022)

	2018	2019	2020	2021	2022
Revenue (Rs m)
Mindtree	54,628	70,215	77,643	79,678	105,253
Mphasis	65,458	78,194	88,435	97,223	119,614
Growth YoY%
Mindtree	4.3%	28.5%	10.6%	2.6%	32.9%
Mphasis	7.7%	19.5%	13.1%	9.9%	22.7%

Source: Equitymaster

Apart from forging innovations in-house, Mindtree has been investing in pertinent partnerships.

Leveraging strong collaborations with the tech leaders like Amazon, Adobe, SAP, Microsoft, Google, etc, the company has developed a strong competitive advantage.

Apart from the existing business, Mindtree is constantly scanning the market for new opportunities. The company has identified two fields that will be the centre for further growth - the Internet of Things (IoT) and cybersecurity.

Mphasis's revenue growth also comes from strong partnerships with the tech giants of the world; Amazon, Google, Microsoft, Salesforce, etc.

A large part of the revenue comes from the adoption of newer technologies in the BFSI (62.7%) and other verticals serviced by Mphasis. Unlike Mindtree, Mphasis has not shown interest in venturing into the burgeoning IoT market.

Mindtree vs Mphasis Revenue Mix by Industry (2022)

Mphasis		Mindtree
BFSI	62.7%	BFSI	18%
Technology and media	13.2%	Retail consumer products and manufacturing	24%
Logistics and transportation	13.2%	Communication and media entertainment	43%
Others	10.8%	Travel and hospitality	15%

Data Source: Company Annual Reports

A well-diversified revenue stream is of utmost importance. So for some reason, if a company loses a client or business in a particular segment or region, the impact on the business will be minimal.

While Mindtree and Mphasis, both enjoy an impressive client roster their level of client concentration, the percentage of revenue that comes from a single client, varies.

For Mindtree, its top client accounts for 28% of the total revenue whereas the top 2 clients account for 33% of the revenue.

For Mphasis, the top client brings in 13% of the total revenue while the top 5 clients bring in 43% of the revenue. This simply implies that Mphasis has a more diversified clientele compared to Mindtree.

However, unlike Mindtree, Mphasis segment revenues are not that well-diversified. It is largely dependent on one segment, the BFSI for 64% of its total revenue. Mindtree boasts a far more diversified source of income.

Mindtree vs Mphasis Revenue Break-up - Regional

Mindtree		Mphasis
North America	77%	Americas	81%
UK and Ireland	9%	EMEA (Europe, Middle East, and Africa)	11%
Continental Europe	7%	India	5%
Asia pacific and Middle East	7%	ROW	3%

Data Source: Company Annual Report

Profitability

A company's profitability is best reflected in its operating margin, which is the operating profit (earnings before interest depreciation tax - EBIDTA) divided by the total earnings.

Simply put, it measures the level of profit a company makes on one rupee of sales from its core operations (before interest and depreciation).

A higher operating margin is centered around two crucial factors. The company is generating higher revenues or is keeping a tight lid on its costs.

Mindtree vs Mphasis Profit Margins (2018-2022)

	2018	2019	2020	2021	2022
Operating Profit (%)
Mindtree	13.6%	15.2%	13.9%	20.8%	20.9%
Mphasis	16%	16.9%	18.7%	18.5%	17.7%

Source: Equitymaster

Barring the one-time effect of the pandemic, Mphasis's operating margins have been consistently higher and growing well compared to Mindtree's.

Employee Profile

The biggest cost head for an IT company is its manpower. The people who create and manage the software and consulting services.

Therefore, a good way to judge a company's profitability is to analyse how much revenue an employee generates. The higher the number, the better it is.

Mindtree vs Mphasis Revenue Per Employee (2018-2022)

	2018	2019	2020	2021	2012
Revenue per employee (in m)
Mindtree	3,082,322	3,475,302	3,530,672	3,346,128	3,417,542
Mphasis	2,943,388	3,193,547	3,350,064	3,298,714	3,395,258

Data Source: Company Annual Report

While Mphasis's current revenue per employee is not much different than Mindtree's. However, it has been advancing, explaining the growth in margins.

Dividend

Dividend yield measures the additional income an investor can make, other than the appreciation in the value of the share. The higher the ratio, the better the return for the shareholders.

Most mature IT companies generate a lot of cash as the capital expenditure to grow is minimal. And so, they tend to be dividend paymasters.

Mindtree vs Mphasis Dividend Yield (2018-2022)

	2018	2019	2020	2021	2022	5Yr Average
Dividend Yield%
Mindtree	1.7%	3.4%	1.5%	1.8%	1.1%	1.9%
Mphasis	2.7%	2.6%	4.3%	5.3%	1.7%	3.3%

Source: Equitymaster

The five-year average dividend yield is not very different for both companies with Mphasis's being slightly higher at 3.3% compared to Mindtree's at 1.9%. However, both are much higher than the current industry average of 2%.

Return on Equity (RoE)

Return on equity is one of the most meaningful indicators of a company's profitability and efficiency.

An excellent tool for analysing the returns of a company, it tells you the amount of money a company can generate on the shareholder capital invested (shareholders equity).

Mindtree vs Mphasis Return on Equity (2018-2022)

	2018	2019	2020	2021	2022
Return on equity
Mindtree	20.9%	22.9%	20.0%	25.8%	30.4%
Mphasis	15.4%	20.6%	20.5%	18.8%	20.9%

Source: Equitymaster

The 5-year average for Mphasis stands at 19.2%, lower than Mindtree's which stands at 23.2%.

A higher number indicates that Mindtree is generating more returns by employing its capital efficiently. However, the number for Mphasis seems to be improving, propelled by the company's rising net profit margin.

Valuation

The most common and effective ratio for comparative analysis and valuation is the price to earnings (PE) ratio. The PE ratio uses the company's earnings to find the value a shareholder is willing to pay for one rupee of earnings.

The PE ratio for Mindtree currently stands at 28.8. This is much higher than its 10-year average of 20.7 and the current industry PE of 25.7. This indicates the stock is overvalued.

The PE ratio for Mphasis is 27.7, which is much higher than its 10-year average of 16. This indicates the stock is overvalued.

Bright Prospects

Companies want to adapt and digitise their core faster than before to survive and thrive in this emerging new economic order.

The seamless technological transformation will propel technology spending to astronomical highs.

Driving up data usage will trigger a strong demand for data storage and protection. Eventually resulting in increased investments in digital, analytics, cloud, internet of things (IoT), cybersecurity, and other emerging technologies.

These services are expected to grow exponentially. Cloud services alone are expected to become a US$ 300 bn market.

Considering India has developed into an IT hub over the past decade, this can be a great opportunity for established players, like Mindtree and Mphasis.

Mindtree or Mphasis: Which is better?

With a strong outlook and solid fundamentals in place, the long-term view for both, Mindtree and Mphasis seem bright.

While both the companies registered steady revenue growth, Mphasis is the only one that has expanded its profit margins. However, unlike Mindtree they need to diversify their revenue source.

But when it comes to return on equity, Mindtree has been reporting higher numbers than Mphasis, offering investors more bang for their buck.

From a valuation perspective, the shares of both companies are trading at similar levels but a premium to their industry PE of 25.7.

Still wondering which is better?

Use our feature-rich comparison tool, which draws a detailed comparison between any two companies.

This tool also includes a graphical analysis making it easy for you to see trends!

You can also compare companies with their peers.

Mphasis vs Wipro

Mindtree vs Tata Elxsi

For a more detailed analysis of the mentioned IT, check out the Mindtree factsheet and Mphasis factsheet.

You can also check out the latest quarterly result for Mindtree and Mphasis.

Since stocks from the IT sector interest you, check out Equitymaster's powerful Indian stock screener tool to find the top IT companies in India.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...