Mastek - Growth challenged - HDFC Securities

Mastek reported a muted quarter; revenue growth of +3.1% QoQ CC was led by the integration of MST and organic growth was flat QoQ. The organic growth was impacted by NHS and US oracle portfolio offset by growth in UK private. The impact of NHS restructuring has been ~USD 25mn over the last nine months, with recovery taking longer than expected. Despite investments in the US, the recovery is taking longer than expected. Management expects synergy benefits from MST acquisition (Salesforce capability) which can lead to deal wins. It also expects a revival in the UK government spending, led by political stability and the completion of NHS restructuring. The order book improved by 5.3% QoQ CC to USD 206mn, indicating a revival in organic growth, provided revenue leakage from NHS and US oracle is over. The EBITDA margin will be in the range of 17-18% in the short to medium term, supported by operating levers like utilisation improvement reduction in sub-con. We cut our FY24/25E EPS by ~4/2% and maintain our REDUCE rating, considering growth challenges. Our TP of INR1,800 is based on 15x Sep-24E EPS.

Q3FY23 highlights: (1) Revenue, at USD 80.1mn (+3.1/+20% QoQ/YoY CC), came in lower than our estimate of USD 81.9mn. The UK geography reported a decline of -2.5% QoQ, impacted by NHS; (2) Retail services declined by - 8.4% QoQ while healthcare/BFSI/manufacturing grew +11.5/10.3/+5.2% respectively due to MST integration; (3) EBIT margin declined 15bps QoQ to 14.3% (vs our estimate of 14.8%), impacted by higher employee cost, higher travel and lower utilisation; (4) Evosys reported revenue de-growth of -6.9% QoQ due to issues in the US Oracle portfolio; (5) Mastek headcount declined by 123 employees on a net basis in Q3FY23 and attrition declined by 90bps QoQ to 23.3%; (6) the 12-month order backlog improved by 10.2% QoQ to USD 206 mn.

Outlook: We expect USD revenue growth of +7.2/11.2/13.5% in FY23/24/25E and an EBITDA margin of 17.7/18.1/18.9% in FY23/24/25E, resulting in an FY22-25E EPS CAGR of 12%.

Shares of Mastek Limited was last trading in BSE at Rs. 1693.50 as compared to the previous close of Rs. 1695.60. The total number of shares traded during the day was 2321 in over 651 trades.

The stock hit an intraday high of Rs. 1710.00 and intraday low of 1680.80. The net turnover during the day was Rs. 3935680.00.

Source : Equity Bulls

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