MphasiS Limited — Q3 FY26 earnings call

I think the short answer is it definitely provides us some operating leverage as we start infusing agentic approach into the deal. Because what we're really doing is eliminating a bunch of human effort and crashing down not just the effort, but also the timeline, complexity and the accuracy rates are helping with that. So, the approach will definitely mean that we have operating leverage. But more importantly, what we're doing today is using that approach to unlock deals that probably were so far either too complex for customers to undertake or too prohibitive from a budget standpoint. As we create enough proof points and lighthouse programs, our confidence and our ability to drive forward a rapid deployment will actually help. I think in some archetypes, especially around modernization, we have a very clear idea of what the value capture path is. And can be moved from the way we used to price these to a different model where theoretically, we have the ability to price them better, and we are seeing that play out already in a few deal archetypes, but I think it's a little bit early to see that across all archetypes. But that's the direction of travel for sure. Now the next question from that will be, how much of that do we give back to the customer? How much of that do we keep? I think that's a never-ending debate, but reality being, if you have enough value being created, there's definitely going to be some that you will be able to keep back into your own P&L, and then you can choose to either take it in the P&L or continue to invest. So far whatever leverage we are getting, we are investing it back in the buildup of the platform, but I think at some point we'll have enough critical mass and scale and proof points to be able to drive this in the direction I just talked about.

Management confirms AI provides operating leverage and unlocks new deals, but currently, gains are reinvested into platform development, indicating future margin potential.

Asked by Nitin Padmanabhan

So Nitin, if you look at right, while borrowing has gone up, the gross cash balance has also gone up. The reason we do borrowing is more in terms of mismatch in cash flow between the geographies. And we had a couple of payouts from an acquisition purchase consideration, which was deferred, came through in this quarter, and we used temporary financing, short-term borrowing to do that rather than send money from India, given the arbitrage of interest rates vis-a-vis the borrowing cost. So, that's the only reason for the borrowing. And it will keep moving up and down. We've seen kind of similar levels four quarters or six quarters back. We keep coming down and up. So, that's what I would say. It's not a trend per se.

Clarifies that debt increase is not a structural trend but due to temporary financing for acquisition payouts and cash flow mismatches, which is important for assessing financial health.

Asked by Nitin Padmanabhan

Again, over the last couple of quarters, maybe a year, I've actually said that discretionary spend, as we knew it, is unlikely to come back in the same shape and form. The way we are seeing spends today is - first and foremost, again it's too early but three weeks into the new year, it is very apparent that spends are going to be stable to slightly up this year. I don't think any clients is in a mode that they will see a reduction in total spends. What is also clear is, there is going to be a reprioritization of spends because they have to free up money in investing in the AI fabric, whether it is stack, whether it is migration to the stack, deploying new agents, software spends etc. So, I think there is new spend available, there is money being spent on buildup of the new stack. If you're aligned to that, to capturing that spend, you will see net new spends available to you as a provider.

Management indicates a shift in client spending patterns, with discretionary spend being reprioritized towards AI and efficiency, creating new opportunities for aligned providers like Mphasis.

Asked by Sulabh Govila

I think part of the reason we started publishing the correlation is because we think the correlation is going to continue to improve given that we are not seeing any client-specific issues that we did see in the early part of 2025. So, that's probably the biggest delta between TCV because this is net new TCV growth, not all of it will translate into company growth, because company growth is the net revenue that you see growth based on all your ramp-ups and of course, ramp-downs. So, I think there is some of that playing in. Again, by simple math, you guys can do the same math, you eliminate the impact of one vertical on the overall growth, our actual revenue growth is well past mid-teens already. So, I think we just had to be patient. We have just continued to focus on driving deal wins, so we can grow around that particular issue. That issue is now behind us. We called for bottoming last quarter. It has bottomed. So, we definitely expect the deal wins to continue to accelerate the growth, and I called for that in my script as well.

Management explains that TCV is a leading indicator for future revenue, and transformation deals have a ramp-up period. They also imply that underlying revenue growth is stronger if specific vertical impacts are excluded.

Asked by Vibhor Singhal

I think it's fair to assume that the AI strategy is centering on intelligently orchestrating through our own platform, multiple third-party systems, integrating LLMs, proprietary solutions, and third-party assets. So, while there is a build component to what we are doing, a large part of the build component will actually run through our OpEx. But in some cases when we do have to integrate some third-party assets or we need to buy some third-party platforms to integrate in, some of that will definitely get capitalized, and I think we talked about that in the October earnings call as well. And maybe Aravind, you can expand on the second part of the question. So, that is the reason why we had this as an intangible under development as of September 30, and then when we launched the platforms on end of October, we placed it and that's getting charged off to P&L over a period of time. You would have also seen a little bit of a bump in the CapEx line item on the cash flow which also pertains to this, with some to go, but a large portion of that CapEx has also kind of got paid out, right. On the other assets, there are multiple elements to it, right. And we have had a lot of discussion on it between Q1 and Q2, largely around the large deals that we have made upfront investments and also in the nature of contract assets, where as we shift to more fixed price projects, unbilled in fixed price projects come under contract assets till customer delivery, and we said that that would kind of wind down. And you've seen that in our DSO slide, as we get more and more customers, milestone approval. So that's a big answer. Not much movement on that line item in Q3 vis-a-vis Q2. So, this is frankly a lot of bump up that happened in Q1 and a bit in Q2 on the back of some of the large deals that we won.

Management clarifies that AI investments are a mix of OpEx and CapEx, with some platform integrations being capitalized, explaining the increase in intangibles and CapEx.

Asked by Girish Pai

I don't see a scenario where clients will spend less on tech. I think if anything their spend on tech versus spend on people will be in favor of spend on tech.

Management provides a positive outlook on overall tech spending, suggesting that AI will reallocate spend towards technology rather than reducing total tech budgets.

Asked by Rahul Jain

I think that's a fair question. So, it's fair to say that we were probably the first ones to callout growth in BFS. Actually, almost six or seven quarters ago, we called for a bottoming in that business once we saw the macro environment getting stable. And then, of course, in the last four or five quarters, we've seen some strong growth coming out of BFS and now Insurance in the last couple of quarters. Two things have happened there, one is, in general, the banks and financial institutions have been in a pretty strong earnings environment in the US, especially. Even in Europe as well, because the NIMs were so high that they were actually sitting on record spreads. So, that at least, at a macro level, kept a lot of the short-term cost-cutting pressures away. Of course, they were very diligent with the spend. So, it's not like there was the spending faucet was on. And second, the regulatory environment and the deal-making environment has been pretty strong in the last 12 months and is expected to be strong this year as well, whether it is M&A activity, IPO activity, and that has a direct impact on bank earnings and just the regulatory environment. Third, banks in general are early adopters of all new tech trends. And we are starting to see some significant programs; some significant numbers being laid out. Some of them are coming from internally repurposed spends, and some of them are obviously, additional investments that the banks are going to make in creating a bank-wide AI fabric or adopting capabilities across the value chain. So, I think it's a little bit of a nice complement of things that have happened in the banking space and has been a good space to play in over the last 12-18 months. And positioning wise, having the engineering positioning, having the ability to drive some of these solutions around transformation has definitely helped us gain, I would say, a disproportionate share as this spending has recovered, and we still see room for that as we go forward.

Management details multiple macro and industry-specific factors (strong earnings, high NIMs, regulatory environment, early tech adoption) driving BFSI growth, suggesting sustainability.

Asked by Vibhor Singhal

I think that's in a way, an alternate mechanism to bring down interest rates and provide more liquidity into the funding markets. If that happens, the volumes will pick up. If the volume picks up, we will benefit, and other than that, I don't see how it will directly have any correlation to our business. But if the net impact is increase in volumes, increase in home-buying activity and lower interest rates, then definitely we'll benefit.

Management explains that while not directly correlated, policies that boost mortgage volumes and lower interest rates would indirectly benefit their business.

Asked by Girish Pai