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Mastek: Missing focus

Aug 6, 2003

Mastek has posted a topline growth of 30% YoY and a net profit growth of 21% YoY for FY03. However, for 4QFY03, the company’s performance has been dismal. For this period, while revenues have declined by 10% QoQ, bottomline has fallen at a faster rate.

(Rs m) 3QFY03 4QFY03 Change FY02 FY03 Change
Sales 978 883 -9.8% 2,869 3,729 30.0%
Other Income 13 38 193.1% 57 73 26.9%
Expenditure 774 820 5.9% 2,287 3,081 34.7%
Operating Profit (EBDIT)** 204 63 -69.1% 582 648 11.4%
Operating Profit Margin (%) 20.9% 7.1%   20.3% 17.4%  
Interest 2 6 190.0% 8 11 32.9%
Depreciation 33 55 66.4% 109 140 29.0%
Profit before Tax 182 40 -77.8% 522 570 9.1%
Extraordinary items 0 0   0 0  
Tax 21 11 -49.5% 105 64 -38.8%
Profit after Tax/(Loss) 161 30 -81.5% 417 505 21.2%
Net profit margin (%) 16.5% 3.4%   14.5% 13.5%  
No. of Shares 14.0 14.0   14.0 14.0  
Diluted Earnings per share* (Rs) 46.0 8.5   29.8 36.1  
P/E Ratio (x)   24     6  
* annualised            

The growth in topline for FY03 is mainly contributed by increase in contribution from the software development division, which has seen a YoY growth of around 48%. Contribution from other segments viz., implementation and products have declined by 44% and 35%, respectively. It is to be noted that both these segments are high-value add segments relative to development and maintenance. Thus, Mastek’s declining share of revenues from these (products and implementation) do not augur well for the growth prospects of the company going forward. However, revenues from maintenance have shown an increase of 10% YoY. The company added 5 new customers in 4QFY03, taking its active clientele to 69 in FY03. However, top five clients of the company continue to contribute to around 50% of Mastek’s revenues. This is a cause of concern.

In FY03, Mastek increased its penetration in the financial services (FS) and government verticals, while revenue contribution from telecom, education, retailing and manufacturing segments showing a decline. Increase in revenues from the FS vertical is because of Mastek winning major outsourcing contracts in this space from a Fortune 500 player and a state government in India. During 4QFY03, the company forayed into the banking domain in the US through formation of Carretek LLC, in association with Carreker Corporation, a US based provider of consulting and software solutions to the banking industry.

Despite growth in revenues, a relatively higher increase in expenditure has dented Mastek’s operating margins for FY03. While staff expenses as a percentage of revenues have declined from 59% in FY02 to 54% in FY03. However, increase in traveling and other expenses is the major reason for rise in total expenses in FY03. Also, significant increase in interest outgo and depreciation expenditure has pared bottomline gains.

Rising expenses...
(Rs m) FY02 % of revenues FY03 % of revenues Change
Staff expenses 1,678 58.5% 2,014 54.0% 20.0%
Travelling & conveyance 195 6.8% 274 7.3% 40.3%
Others 415 14.4% 794 21.3% 91.6%
Total expenditure 2,287 79.7% 3,081 82.6% 34.7%
Total revenues 2,869   3,729   30.0%

Mastek launched its BPO operations in FY03, through a wholly owned subsidiary Mastek BPO Pvt. Ltd. At the present, the company is likely to focus on the transaction processing business in the banking and financial services space. This foray into the fast-growing BPO services space is in line with what other Indian software companies are doing. However, success in this space will depend a lot on the kind and size of offshoring contracts that Mastek is able to garner going forward.

At the current market price of Rs 208, the stock is trading at a P/E of 6x its FY03 earnings. For FY04, the management expects a growth of 23% in topline and a decline of around 30% in bottomline. The projected growth for FY03 was lowered twice, and this spells low visibility of the company’s earnings. The present projections are indicative of the pressure that the company is facing at the present and is likely to face going forward. Despite low valuations, the risk on the stock is on the higher side. This is due to Mastek’s poor track record.

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