BUY Mastek: AnandRathi Institutional Research

Mastek - Bad quarter, but company available at cash; Buy with a target price of Rs 170.

Mastek reported disappointing Q3 figures, more so on the margin front, on account of weak execution, leading to cost overruns. It reported 3.2% qoq growth to $21m, though that included a final billing from the LPT JV, of $0.8m. On the EBITDA front, it suffered from project cost overruns to the tune of Rs. 77m (a Rs. 262m loss in 9M FY16), which dragged margins down.

Dollar revenue growth at 3.2% qoq, driven by one-time LPT revenue. It reported $21m in revenue (up 3.2% qoq, down 51.4% yoy) including revenue from LPT of $0.8m. Excluding the LPT contribution, its revenues were down 0.6% qoq in dollars (the pound depreciated 2% against the dollar during Q3). The closure of the LPT JV project was a huge disappointment during the quarter as hopes from this project in terms of revenue contribution in FY17 /18 were high.

EBITDA margin at 5.5%, excluding the impact of loss on one project. Weakness in execution led to cost overruns in one project, resulting in a loss of Rs. 77m in Q3 FY16 and Rs. 262m for 9M FY16 (the company's FY15 EBITDA was Rs. 566m). The project losses will continue in Q4 although they are expected to come down gradually in FY17. On a 9M basis, after adjusting for losses on assignments, the company is running at ~11% EBITDA margin (or EBITDA of Rs. 417m in 9M FY16).

Current price doesn't factor in any improvement ever. Mastek's cash balance of Rs. 3,249m (cash equivalent of Rs. 1,111m plus Majesco stock worth Rs. 2,138m) is 94% of the market cap of Mastek (Rs. 3,466m). The balance 6% is equal to Rs. 217m, which is the value of the core IT services business, with an EBITDA of Rs. 156m in 9M FY16 and an adjusted EBITDA of Rs. 417m in 9M FY16. This is too pessimistic a view from one-year perspective.

Valuation. We are sharply reducing our estimates for FY16/17 (by up to 30% at the EBITDA level) leading to a price target of Rs. 170 a share (8x FY18e EPS and a 15% discount to the Majesco stake) till clarity emerges on M&A in the US and on its recovery from the loss-making project. Risks: Weak execution.

Shares of MASTEK LTD. was last trading in BSE at Rs.131.1 as compared to the previous close of Rs. 138.9. The total number of shares traded during the day was 59243 in over 1129 trades.

The stock hit an intraday high of Rs. 136.5 and intraday low of 128.7. The net turnover during the day was Rs. 7851795.

Source : Equity Bulls

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