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Mastek: Roller coaster ride - Views on News from Equitymaster
 
 
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  • Jan 15, 2001

    Mastek: Roller coaster ride

    Mastek had the distinction of joining Geometric in the list of software companies that have issued profit warnings. For the 2QFY01 Mastek’s revenue was Rs 209 m. The net profit figure was Rs 28 m down 58% compared to same quarter last year. According to the company the net profit figure was low due to three reasons:

    • Stock option amortization
    • Provision for bad debt. (Due to doubts about a dot-com being able to pay its bills)
    • Lower sales growth from the US.

    The stock amortization arose due to regulatory requirements. The company claims that it had no clue of this till first week of December. Lower sales growth from the US is due to the fact that Mastek has had a problem with its team in the US. In the past 18 months it has seen two CEOs and a number of employees leaving the US subsidiary.

    (Rs m) 1QFY01 2QFY01 Change
    Sales 251 209 -16.7%
    Other income - 2  
    Expenditure 163 156 -4.2%
    Operating Profit (EBDIT) 88 53 -39.7%
    Operating Profit Margin (%) 35.2% 25.5%  
    Interest 2 0.1 -95.7%
    Depreciation 16 20.3 26.1%
    Profit before Tax 70 35 -50.1%
    Tax - 7  
    Profit after Tax/(Loss) 70 28 -59.9%
    Net profit margin (%) 27.8% 13.4%  
    Diluted number of shares 6.9 6.9  
    Diluted Earnings per share* 40.4 16.2  
    P/E (at current price) 5.4 13.4  
    *(annualised)      

    Mastek has managed to get a team in place for the US operations and is hoping that results will show by the end of June 2001 or beginning FY02. Mastek has one of the highest employee costs in the Industry (42%). Even with this kind of employee costs it has an attrition rate in the region of 17% that is marginally below the industry average 25%.

    To improve the situation and grow in line with the software industry rates the management has charted out a two-pronged strategy. Firstly, it will look at establishing long-term relationships with the Fortune 1000 companies. The next part will be technology focus where it will look at areas like embedded software. Another focus area of the company is e-CRM (e-customer relationship management) services. According to Gartner, this industry is expected to grow from US $ 8 bn in 1998 to $ 78 bn in 2003.

    In the long term Mastek plans to acquire companies in Europe and UK, forge alliances and build domain expertise. One of the reasons for Mastek’s problems could be the lack of domain expertise in the company, which it plans to gain through alliances and acquisitions.

    In retrospect the biggest problem with the company is its risk management systems. Twice it has suffered due to clients failing to meet their financial obligations. This quarter it was due to a dot-com. The number of dot-com clients currently is six and the revenue contribution is about Rs 150 – 200 m (3% of total revenues).

    Mastek plans to add about 200 employees next year. The order book size is about Rs 1,340 m of this about Rs 1,200 m of orders will be executed by July 2001.

    With Mastek’s track record it is very difficult to be confident of the organisations performance in the near future. But then due credit has to be given to the company for its bold initiatives like trying to introduce products. Like the management says, “Talk is cheap”, the only way Mastek can impress is show some figures that will make everyone sit up and notice.

     

     

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