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Mastek: Other income takes toll

Oct 10, 2002

Mastek has posted a strong topline growth for 1QFY03. The company’s revenues have grown sequentially by 11%. However, a steep fall in other income has taken a toll on the net profit figure. Consequently, the company’s net profits fell by 10% when compared on a sequential basis. Had the other income been same as in 4QFY02, the net profits would have grown sequentially by 9%. Eliminating other income for both the quarter net profits have growth by 11% sequentially. The decline in operating margins is due to increase in traveling expenses that the company has not been able to contain. Further, the other income figure has also declined steeply. The other cost head too has shown a significant (56% sequential) growth. While the growth in topline is undoubtedly impressive, the steep decline in operating margins is rather surprising.

On a YoY basis the company’s revenues have grown by a steep 44% and the net profits have grown by 270%. These numbers look very impressive because the company was just beginning to turn around after posting losses for 4QFY01. Thus, a lower base has inflated the growth in net profits on a YoY basis.

(Rs m) 4QFY02 1QFY03 Change
Sales 818 911 11.4%
Other Income 38 5 -85.5%
Expenditure 612 726 18.7%
Operating Profit (EBDIT) 206 185 -10.3%
Operating Profit Margin (%) 25.1% 20.3%  
Interest 4 2 -55.5%
Depreciation 21 20 -2.6%
Profit before Tax 219 168 -23.2%
Extra-ordinary income / (expense) - -  
Tax 50 16 -67.9%
Profit after Tax/(Loss) 170 152 -10.0%
Net profit margin (%) 20.7% 16.7%  
No. of Shares (eoy) (m) 14.0 14.0  
Diluted Earnings per share* 48.6 43.7  
P/E (X)   9.3  

New client additions totaled 16 during the quarter. This is a significant improvement compared to 4QFY02, when the company added 4 clients. However, the number of active clients decline marginally from 72 in 4QFY02 to 70. Nine of the new customers are from the airline, insurance and retail verticals. The company’s repeated business stood at 96% for the quarter. According to the company, there has been a ramp up in two strategic accounts in the US that were acquired during the past two quarters.

The growth in topline mostly stemmed from the US geography that posted a significant 32% sequential growth. Historically, Mastek’s performance has been weak in the US geography. Infact Mastek saw revenues from the US climb down from 44% in FY01 to 25% in FY02, a decline of 37%. However, the company had been making efforts to improve its operations in US and the results are now showing. However, revenues from the company’s stronghold, Europe, declined by 2% sequentially. Consequently, the revenue mix changed significantly in favour of US, which now contributes 26% to the total revenues (21% in 4QFY02). The contribution to revenues from Europe declined to 61% as compared to 65% in 4QFY02.

The revenues from development (70% of revenues) grew by 6%, while those from maintenance (22% of revenues) were stagnant. Considering the business environment growth in development revenues is commendable. For the Past six to seven quarters as Indian software companies have been facing tough business environment, almost all the companies have been vying for business from the maintenance segment. This is due to the fact organisations have to keep their systems up and running slowdown or no slowdown. Thus, the spending on maintenance is not discretionary. Consequently, the revenue stream offers greater visibility in uncertain times. Due to the market getting crowded smaller players like Mastek will find it very difficult to grow. The company saw strong growth in revenues from products and implementation.

Among the verticals, financial services, education, IT & Other services, manufacturing showed growth. However, revenues from the most dominant vertical, Government showed a sequential decline. These revenues come from projects Mastek does for Government Utilities in Europe. This includes the London Congestion Charging Scheme (LCC) project.

The company had earlier given a guidance of 45% to 50% growth in revenues for FY03, while the net profits were expected to grow in the range of 42% to 52%. Going forward the company needs at least two quarter with more than 7% sequential growth. This could be an uphill task considering the uncertainty in the business environment. However, as far as the growth in net profits is concerned the company will be able to beat its guidance even if the net profits continue to decline sequentially by 3% for the next three quarters. At the current market price of Rs 407, the stock is trading at a P/E multiple of 10x. Based on the performance the valuations are like to improve going forward. Thus, the stock price is likely to move north.

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