Maintain BUY on Mastek - Strong performance, leadership overhang remains - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Mastek delivered strong revenue and margin performance, which were ahead of our estimates. Mastek's organic business was up 8.3% QoQ due to strong growth in UK government business (NHS) and stability in UK private portfolio post Brexit. The UK government business will continue to perform, given Mastek's strong relationship, integration of Evosys capabilities, and revival of UK government spending. Strong growth in Evosys continues (+10.6% QoQ), driven by cloud adoption. Mastek's and Evosys' go-to-market strategy will provide access to new clients and geographies with ample cross- sell opportunities. Mastek's margin profile has witnessed a complete reset in the last few quarters, led by the integration of higher-margin Evosys business and margin expansion in the core business. An increase in offshoring, lower sub-con, and operating leverage resulted in EBIT margin expansion of ~800bps in 9MFY21. Uncertainty around the hiring of the new CEO remains the biggest overhang; clarity will emerge in 1-2 quarters. We increase our EPS estimates by 4/6% for FY22/23E due to margin reset. Our target price of Rs 1,500 is based on 15x Dec-22E EPS. The stock trades at a P/E 16.0/13.5x FY21/22E. Maintain BUY.

3QFY21 highlights: Revenue stood at USD 60.1mn (+9.1% QoQ) vs. est. of USD 57mn. In CC terms, revenue was up 7.3/73.9% QoQ/YoY. The order book growth, which was muted due to seasonality, stood at USD 130mn (+1.6% QoQ). The UK government/Healthcare/BFSI was up +2.5/31.1/17.0% QoQ. Mastek added 57 new clients and resumed offshore hiring. Net cash stands at INR 5.21bn (15% of mcap), which the company will use for the US acquisition.

Outlook: We expect USD revenue growth of +51/15/13% in FY21/22/23E with Mastek growth at +7/13/11% and Evosys growth at +14/19/15% for FY21/22/23E respectively. We estimate EBIT margin at 18.5/17.5/18.1% over FY21/22/23E, resulting in FY21-23E EPS CAGR at 17.8%.

Shares of MASTEK LTD. was last trading in BSE at Rs.1209 as compared to the previous close of Rs. 1194.15. The total number of shares traded during the day was 16050 in over 1431 trades.

The stock hit an intraday high of Rs. 1235.3 and intraday low of 1198.05. The net turnover during the day was Rs. 19499023.

Source : Equity Bulls

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