Initiating Coverage - Mastek Ltd - HDFC Securities Retail Research Desk

Our Take:

Mastek Ltd's 12 month order backlog was Rs 946.7 crore ($129.6m) as on 31 st December, 2020 as compared to Rs 940.5 crore (US$ 127.5 mn) in Q2FY21, reflecting a growth of 0.7% in rupee terms. The Company added 57 new clients in Q3FY21. Total client count as of 31st December, 2020 was 618 (LTM) as compared to 542 (LTM) in Q2FY21. Mastek is expecting strong growth from multi-year deals led by integration of Evosys and its capability to offer end to end solution.

On Oct-2020, Mastek's material wholly-owned subsidiary - Mastek (UK) was holding 20,18,192 stocks in Majesco (USA) had tendered its entire stake with the Acquirer of Majesco (USA) for cash, and has received the consideration aggregating to US$ 32.30 mn on October 19, 2020. This decision to sale its stake in Majesco could help Mastek (UK) to drive its growth strategy and reduce the borrowings.

On Feb-2020, Mastek acquired Evosys, the combined business significantly expanded the portfolio of services and market opportunities. Evosys operates in a high growth segment of Enterprise Cloud Applications where Oracle is one of the leading players for cloud applications in HCM (Human Capital Management), ERP (Enterprise Resource Planning), SCM (Supply Chain Management) and BI (Business Intelligence). Evosys is a recognised leader and focused on Oracle Cloud implementation & consultancy with 13 years of experience and 1000+ Oracle Cloud customers across 30+ countries. The cloud services market continues to grow faster than traditional IT segments and Mastek has seen healthy opportunity on digital transformation phase in the industry.

Mastek reported robust margins over the last three quarters and has many levers to improve margins like higher offshoring, SG&A rationalisation and optimisation of employee cost along with sales as well as administration cost. We expect, EBIT margin of ~17-18% in FY22E and FY23E. UK Government & Evosys which is likely to contribute ~70% of Mastek FY22E revenues are expected to deliver higher margins (UK Govnment-18 & Evosys-22%) while the remaining 30% of the is likely to be low margin at ~13-14%.

Valuations & Recommendation:

Mastek has witnessed a sustained improvement in its business profile and geographical presence over the past, supported by increase in scale and diversification of revenues across business segments while generating adequate returns. Mastek has a longstanding relationship with the UK government as it has been working as a subcontractor to large IT companies for execution of UK government's projects over the past. This long-term relationship, experience in Government as well as private project in various geographies and excellent execution capabilities could help to Mastek as a prime beneficiary of UK government's digital spends.

Acquisition of Evosys, has helped the company in diversifying its geographical presence, product and service mix, along with customer diversification. Market share gains on the back of inorganic expansion are expected to drive the company's long term growth. We think the Base case fair value of the stock is Rs 1273 (12.5x FY23E EPS) and the bull case fair value of the stock is Rs 1374 (13.5x FY23E EPS) over the next 2 quarters. Investors can buy the stock on dips to Rs 1118-1122 band (11.0x FY23E EPS) and add more on dips to Rs. 1016-1020 band (10.0xFY23E EPS). At the LTP of Rs 1172, stock trades at 11.5x FY23E EPS.

Shares of MASTEK LTD. was last trading in BSE at Rs.1204 as compared to the previous close of Rs. 1133.6. The total number of shares traded during the day was 16441 in over 2260 trades.

The stock hit an intraday high of Rs. 1205 and intraday low of 1125.15. The net turnover during the day was Rs. 19346279.

Source : Equity Bulls

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