Maintain BUY on Mastek - Minor misses, recovery underway - HDFC Securities

Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities and Mr. Vinesh Vala, Institutional Research Analyst, HDFC Securities

We maintain a BUY on Mastek, despite a soft Q2 (though in line with estimate), based on an expected recovery in the UK government business and ongoing turnaround in the US business. The softness in the quarter was mainly due to project completion in the NHS (health segment) and the contract awarding has been slow; excluding NHS, growth was ~9% QoQ. We expect the growth trajectory for Mastek to revive, based on (1) a strong footing in the UK government business; (2) cloud migration/transformation agenda, which is driving Evosys growth; (3) expected recovery in the NHS, based on deal wins; and (4) healthy recovery in the US geography and UK private segment. The deal pipeline is healthy, with around 25 deals of > USD 5mn+ in the pipeline and a large deal of ~USD 40mn (three-year deal) is near closure. Mastek closed a large deal in Europe, which is expected to ramp up from Q4, providing revenue visibility. The next phase of growth will be driven by US geography; the company is looking for an M&A for a head start. The EBIT margin was maintained but there will be headwinds due to planned investments, higher attrition, and an increase in freshers' hiring. We have cut our EPS estimate by 2-3% and our TP of INR 3,300 is based on 24x Dec-23E EPS. The stock is trading at a P/E 25.2/20.5x FY22/23E, which is a discount of ~36% to the tier-2 IT average.

Q2FY22 highlights: (1) Revenue stood at USD 72mn (+3.9% QoQ CC) vs. the estimate of USD 71.8mn, supported by a strong recovery in the US geography (+21.2% QoQ) and UK private offset by weakness in NHS; (2) the 12-month executable order book stood at USD 156mn, down 1.6% QoQ; (3) EBIT margin contracted 77bps QoQ to 19.2% due to wage hike and supply side concerns (attrition inched up to 24.2%); (4) retail/UK government/BFSI vertical supported growth (+7.5/+6.4%/+4.6% QoQ) while the healthcare vertical was under stress (-16.3% QoQ); (5) cloud and enterprise apps, which is primarily Evosys, was up 7.7/37.5% QoQ/YoY; (5) Mastek hired 208 employees on a net basis and plans to add more freshers in H2.

Outlook: We expect USD revenue growth of +25.7/15.3/14.8% in FY22/23/24E, which implies a CQGR of +2.5% for Q2-Q4FY22E. We estimate EBIT margin would come in at 17.8/18.0% in FY22/23E, resulting in an FY21- 24E EPS CAGR of 25.3%.

Shares of Mastek Limited was last trading in BSE at Rs. 2851.00 as compared to the previous close of Rs. 2826.10. The total number of shares traded during the day was 29430 in over 5996 trades.

The stock hit an intraday high of Rs. 2983.00 and intraday low of 2830.00. The net turnover during the day was Rs. 85545007.00.

Source : Equity Bulls

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Mastek INE759A01021 ITSoftwareProducts HDFCSecurities