Maintain BUY on Mastek - Taking the right leap - HDFC Securities

Mastek (Q4FY20): Taking the right leap. Maintain BUY
(TP Rs 400 CMP Rs 346 MCap Rs 8 bn)

Mastek delivered strong revenue and margin performance led by the integration of Evosys. Mastek organic growth (+1.1% QoQ) was inline led by traction in UK Govt. (+6.9% QoQ CC) offset by weakness in UK private (Covid+Brexit) and US (-18.5% QoQ CC). Weakness in US (Retail) and UK Private (Retail+BFS) will impact Mastek organic growth in FY21E. Margin expansion (+349bps QoQ) in the quarter was led by the integration of high margin Evosys business. We assume Evosys revenue of USD 63mn and ~19% EBITDA margin for FY21E. We cut our USD revenue estimate by 4.1/3.6% for FY21/22E due to high exposure to Retail (~22% of rev) and Covid-19 uncertainty. We increase our EPS estimate by 13.1/19.4% for FY21/22E to factor in higher-margin Evosys integration and currency tailwind. Our TP of Rs 400 is based on 7x FY22E EPS plus Rs 36/sh for ~5% stake in Majesco US. Maintain BUY.

Revenue stood at USD 46.6mn (vs. est. USD 43mn) led by a higher contribution from Evosys (USD 12mn vs. exp of USD 8.2mn). In CC terms revenue was up 36.1/23.4% QoQ/YoY led by inorganic push. The demerged part of Evosys was integrated for two months, while ME business contributed only for one month. Mastek organic growth will be supported by higher spending by UK Govt. (post-Brexit) and the new deal wins.

The total order backlog increased by 57% QoQ to USD 104mn due to Evosys integration (USD 47mn). The organic order book declined 14% QoQ to USD 57mn due to deal deferrals and cut in discretionary spend (Retail).

EBITDA margin stood at 17.3% +104bps QoQ (vs. est. of 15.0%). Evosys is an Oracle cloud migration partner and commands a better margin due to higher fixed-price contracts and offshoring.

Mastek paid USD 65mn in cash for Evosys and share issuance will happen post the NCLT approval. Net cash post the transaction stands at Rs 0.81bn and OCF/EBITDA improved to 117% in FY20 vs. 56% in FY19.

Valuation and view. Mastek organic revenue was down 5.1% in FY20 due to Brexit uncertainties and US restructuring. The UK Govt. spending has revived but the UK private sector is still facing the dual impact of Brexit and Covid-19. US revenue is impacted by Retail slowdown and recovery is difficult in the near term. Offshoring remains an opportunity with the UK public sector given Mastek's long relationship with UK Govt. and limited competition from Indian IT vendors. Evosys growth will be muted in FY21E due to ME exposure (Crude crash + COVID) and margin will come down due to higher investments. We expect USD rev/EBIT/PAT CAGR of +18/25/17% for FY20-22E. The stock trades at a reasonable valuation of 7.7/6.7x FY21/22E and has witnessed a strong run-up of +43/71% in the last 1M/3M.

Shares of MASTEK LTD. was last trading in BSE at Rs.380.95 as compared to the previous close of Rs. 346. The total number of shares traded during the day was 100453 in over 5978 trades.

The stock hit an intraday high of Rs. 415.2 and intraday low of 369.4. The net turnover during the day was Rs. 39552457.

Source : Equity Bulls

Keywords