Nomura Financial Advisory and Securities has maintained 'Neutral' on Mphasis with revise target price of Rs 410 from Rs 415 as against current market price (CMP) of Rs 399 in its report.

Commenting on the investment rationale, Nomura said, ''Mphasis' Q1FY14 results did not provide material reason to turn optimistic, with HP channel (37% of revenue) declines continuing; flattish trend in direct channel (ex-Digital Risk) with revenues in a narrow range of USD 110-115 million per quarter over the last nine quarters; concerns related to mortgage business in US lowering our growth expectations for Digital Risk; and Deal TCV of USD 72 million won in direct channel (ex-Digital Risk) over the last two quarters, for an annual revenue base of USD 1 billion+, not providing us comfort on building parity with industry growth.

We see normalized USD revenue CAGR of 4% and EPS CAGR of 7% for FY14-16F. Dividend yield of 4%+ will likely limit material downside to the stock, although upside triggers are not present, in our view.

We expect HP channel revenue to decline to USD 320 million by FY16F (vs 1Q annualized run rate of USD 380 million); Digital Risk to scale up to USD 220 million in FY16F (a year later than guided earlier and versus 1Q annualized run rate of USD 180 million); and direct channel to grow at normalized CAGR of 10% over FY14-16F.

Management intention of growing the direct channel at 1.5x the industry growth appears aggressive to us, and we look for look for margins to be at lower end of the guided 15-18% band. Our model now builds in the change in year-end from Oct to Mar, with FY14 being the five-month period ending Mar-14. We look for EPS of Rs 38.5/41.1 over FY15/16F. Our new target price of Rs 410 is based on 10x FY16F EPS of Rs 41.1 (methodology unchanged). We prefer TechM (TECHM IN, Buy) to MPHL within Tier-2 IT.''

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