Maintain BUY on Mastek - Strong growth engine - HDFC Securities

Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities and Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities

We maintain BUY on Mastek, following a better-than-expected Q1FY22 (in terms of revenue and margin) and its strong growth prospects ahead. Mastek has seen strong growth for the past five quarters (CQGR of 8.5%), which is expected to continue, based on: (1) traction in the UK government business; (2) strong order booking (+56% YoY); (3) ramp-up of large deal wins (NHS, HMRC, Home Office); and (4) revival of the UK private and US geography. The new CEO would focus on building the US business (both organic and inorganic), reviving the UK private (retail and BFSI), and increasing investment in sales capabilities/talent. The early signs of revival are visible in the US geography (+12% QoQ) - the deals wins in retail, manufacturing, and healthcare verticals indicate continued growth momentum. The EBIT margin was almost flat in Q1FY22 (+524bps YoY) but it is expected to decline by ~90bps in FY22E due to increased investments, wage hike (planned for Q2), and increase in freshers' hiring. We remain positive on Mastek and increase our target multiple to 22x (earlier 20x) and revenue/EPS estimates by +2.3/3.8% for FY23E, based on organic growth acceleration. Our TP of INR 2,800 is based on 22x June-23E EPS. The stock trades at a P/E 26.4/20.5x FY22/23E, which is a discount of ~20% to the tier-2 IT average.

Q1FY22 highlights: (1) Revenue stood at USD 70.2mn (+4.8% QoQ CC) vs. the estimate of USD 68.9mn, supported by strong traction in the UK geography (+6.9% QoQ) and revival in the US (+12.0% QoQ); (2) The 12-month executable order book stood at USD 158mn (+2.5% QoQ), following a strong Q4; (3) EBIT margin expanded 14bps QoQ to 20%, with attrition inching up to 19.6% from 14.3% QoQ; (4) The UK government/retail vertical supported growth (+13.6/+3.5% QoQ) while the BFSI/healthcare verticals remained soft (+0.3/- 2.7% QoQ); (5) Mastek hired 510 employees on a net basis (highest ever in one quarter).

Outlook: We expect USD revenue growth of +25.4/16.6% in FY22/23E, which implies a CQGR of +2.5% for Q2-Q4 FY22E. We estimate EBIT margin at 17.7/18.7% over FY22/23E, resulting in a FY21-24E EPS CAGR at 25.4%.

Shares of MASTEK LTD. was last trading in BSE at Rs. 2499.45 as compared to the previous close of Rs. 2492.8. The total number of shares traded during the day was 49815 in over 6498 trades.

The stock hit an intraday high of Rs. 2600 and intraday low of 2480. The net turnover during the day was Rs. 126256659.

Source : Equity Bulls

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