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Mastek: Cutting costs brings cheer - Views on News from Equitymaster
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  • Apr 11, 2002

    Mastek: Cutting costs brings cheer

    Mastek, one of the top gainers from the BSE A group (from April 2001 to March 2002), continued with its turnaround. The company, Mastek Limited (standalone), reported a steep 11% sequential (QoQ) growth in revenues for 3QFY02. The net profits have, however, declined by 20% QoQ. This is due to significant erosion in operating margins. The figure has declined by almost 7% compared to the operating margins in 2QFY02.

    The decline in operating margins is due to the company reporting a 223% sequential growth in travel and conveyance expenses. This is due to projects being increasingly shifted from onsite to offshore. However, according to the number available for the Mastek Group the revenue contribution to revenues from offshore projects declined from 60% in 2QFY02 to 56% in 3QFY02. Mastek Limited has managed to contain growth in staff and other expenses. The other factors that have contributed to the decline in net profit figure are the drop in other income and a steep increase in depreciation costs.

    (Rs m) 2QFY02 3QFY02 Change 9mFY01 9mFY02 Change
    Sales 239 264 10.6% 645 696 7.8%
    Other Income 6 2 -63.7% 8 13 70.1%
    Expenditure 130 162 25.0% 479 417 -12.9%
    Operating Profit (EBDIT) 109 102 -6.6% 166 279 67.7%
    Operating Profit Margin (%) 45.8% 38.7% 25.7% 40.0%
    Interest 1 0 -51.9% 3 12 317.5%
    Depreciation 14 28 105.9% 66 82 23.5%
    Profit before Tax 101 76 -24.6% 105 199 89.1%
    Tax 7 1 -85.7% 7 13 91.2%
    Profit after Tax/(Loss) 94 75 -20.0% 98 186 89.0%
    Net profit margin (%) 39.4% 28.5% 15.2% 26.7%
    No. of Shares (eoy) (m) 14.0 14.0 14.0 14.0
    Diluted Earnings per share* 27.0 21.6 9.4 17.7
    P/E (X) 19.2 23.3

    For 9mFY02 Mastekís revenues have grown by 8%. The rise in net profits has however been steeper at 89%. This is due to a sharp improvement in operating margins that have jumped from 26% in 9mFY01 to 40% in 9mFY02. As compared to 9mFY01 staff costs have declined by 17% YoY, the drop in traveling costs is 29% and the companyís other expenditure have fallen 61%.

    Mastek Group
    The revenues of the Mastek Group grew by 10% sequentially and rise in net profits was 73% for 3QFY02. The significant growth in net profits is due to an almost 10% rise in operating margins. The improvement in operating margins stems from a 4% sequential drop in staff costs. This is the largest cost head for the company amounting to 56% of revenues.

    (Rs m) 2QFY02 3QFY02 Change 9mFY01 9mFY02 Change
    Sales 647 714 10.4% 1,958 1,995 1.9%
    Other Income 9 2 -76.5% - 16
    Expenditure 558 545 -2.3% 1,728 1,623 -6.0%
    Operating Profit (EBDIT) 89 169 90.3% 230 371 61.5%
    Operating Profit Margin (%) 13.7% 23.6% 11.7% 18.6%
    Interest 5 1 -79.8% 7 18 167.1%
    Depreciation 15 34 126.3% 85 95 12.3%
    Profit before Tax 77 135 75.4% 139 274 97.9%
    Tax 16 30 84.6% 22 67 209.3%
    Profit after Tax/(Loss) 61 105 72.9% 117 207 77.2%
    Net profit margin (%) 9.4% 14.8% 6.0% 10.4%
    No. of Shares (eoy) (m) 14.0 14.0 14.0 14.0
    Diluted Earnings per share* 17.5 30.2 11.2 19.8
    P/E (X) 13.7 20.9

    For 9mFY02, the topline has grown by a marginal 2%. However, the rise in net profits is a steep 77%. This is because last year (during 9mFY01) there was an amortisation of stock compensation worth Rs 22 m, which had dented net profit figure during the period. The absence of such amortisation this year has provided a higher YoY zing to the net profit. The decline in write off for doubtful debts and other expenses has also contributed to the rise in profitability. The sharp rise in taxation however, has dented growth in net profit.

    The revenues from the US geography that declined by 14% for 3QFY02 compared to 2QYFY02 continue to be cause for concern. For 9mFY02 the revenues from the US have fallen by a significant 41%. Revenues from the most dominant geography Europe have recorded a 16% sequential growth in 3QFY02. The growth from the region has been a significant 38% in 9mFY02. However, during 9mFY02, the fastest growth has been from the Asia Pacific region at 66% YoY. Infosys too witnessed the sharpest growth from the Asia Pacific region for FY02.

    Mastek witnessed steep sequential growth in revenues from development services, while the revenue growth for maintenance was subdued. This is contrary to the general trend seen in the industry. With global companies choosing to defer development of new applications and focusing of maintaining existing IT systems, most of the domestic software companies have shown a strong growth in maintenance revenues while the growth in development revenues has been subdued.

    Service offerings 2QFY02 3QFY02 Change
    Development 58.0% 60.0% 14.1%
    Maintenance 31.2% 29.1% 3.0%
    Products 1.2% 1.7% 66.6%
    Implementation 9.6% 9.1% 5.0%

    Among the industry verticals, financial services and retailing showed strong growth. Other verticals that had shown strong growth in 2QFY02 showed a reversal in trend. This included Education and IT & other services. The revenues from projects executed for governments continued to grow. Revenues from the telecom vertical however, continued to decline. Consequently, the contribution to revenues from the vertical declined from 13% in 1QFY02 to 7% in 3QFY02.

    Industry verticals 2QFY02 3QFY02 Change
    Financial Services 26.3% 26.2% 10.2%
    Telecom 8.9% 6.8% -15.9%
    Government 21.2% 33.6% 74.4%
    Education 13.7% 10.7% -13.5%
    IT & other Services 17.7% 12.0% -25.1%
    Retailing 4.2% 5.0% 33.3%
    Manufacturing 8.0% 5.6% -22.4%

    Undoubtedly, the company has managed its internal operations excellently. This is evident from the continuous improvement in margins. Since the growth in net profits has largely come from cost control initiatives and not from growth in revenues, this is the major concern. The Mastek group has seen revenues from the largest market, the US, decline by 41% in 9mFY02. Also, the slowdown in the US has caused other software companies to head towards Europe. This will intensify competition in Mastekís dominant geography. The Mastek Group has managed a strong topline growth in this quarter and is expected to do so in the next quarter.

    Mastek Group 1QFY02 2QFY02 3QFY02
    Revenue QoQ growth -2.6% 2.0% 10.4%
    Operating Profit Margin (%) 18.0% 13.7% 23.6%
    Net profit QoQ growth - 48.2% 72.9%
    Operating Profit Margin (%) 6.5% 9.4% 14.8%

    According to the companyís guidance it expects a 7% to 10% growth in Mastek Groupís topline for FY02. The companyís revenues in FY01 was Rs 2,526 m. Based on the revenue guidance, the revenues for 4QFY02 should be grow in the range of 8% to 9%. The guidance for the 250% growth in Mastek Groupís net profits factors in a 16% sequential decline in net profits in 4QFY02.

    At the current price of Rs 418, the stock is trading at a P/E multiple of 20x based on the profit guidance given by the company. The retails investors should wait for the company to show some consistency in revenue growth, before considering the stock as an investment option.



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