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Mastek: Sober performance

Oct 11, 2001

Mastek Limited
Though Mastek’s 1QFY02 results look disappointing on a YoY basis, the numbers on a QoQ basis look much better. First all let us take a look at what the numbers say in comparison to 1QFY01 (YoY). The net profits are down by 77% and the topline has declined by 22%. Post its profit warnings last fiscal, the numbers have been constantly under pressure. Infact, for the 3QFY01 the company had posted negligible net profits of Rs 0.3 m. However, from 4QFY01, things started to look better.

(Rs m) 4QFY01 1QFY02 Change
Sales 193 193 0.0%
Other Income 10 5 -48.0%
Expenditure 123.9 126 1.5%
Operating Profit (EBDIT) 69 67 -2.8%
Operating Profit Margin (%) 35.8% 34.8% -
Interest (1) 11 -
Depreciation 30 40 36.0%
Profit before Tax 50 21 -57.7%
Tax 3 5 66.7%
Profit after Tax/(Loss) 47 16 -65.6%
Net profit margin (%) 24.4% 8.4% -
No. of Shares (eoy) (m) 13.9 13.9 -
Diluted Earnings per share* 13.6 4.7 -
*(annualised) - - -
P/E (X) - 13.1 -

For 1QFY02, a sequential comparison reveals that the company’s topline has been flat and the net profits have declined by 66%. This decline in the bottomline is increased financial and depreciation expenses. Also, the other income component has shown a significant decline. The heartening point is that the company has managed to maintain operating margins in the range of 30% plus. However, the margins have shown a sequential decline of 100 basis points.

Mastek Group
On a consolidated basis, topline for the Mastek Group has shown a 2.6% decline in revenues and the bottomline has grown by a significant 77% (QoQ). This is based on net profits for 4QFY01 calculated excluding the investment write off by the company in Varstreet. The growth in bottomline comes mainly due to strong control over costs by the company. The operation margins have jumped from 12% in 4QFY01 to 18% in 1QFY02. While the employee costs for the company have grown marginally QoQ, the improvement in margins in mainly due to the decline in provision for doubtful debts. This figure has come down from Rs 39 m in 4QFY01 to Rs 3 m in 4QFY02. However, on a YoY basis the revenues for Mastek Group show a decline in topline (7%) and bottomline (52%).

(Rs m) 4QFY01 1QFY02 Change
Sales 651 634 -2.6%
Other Income - 5 -
Expenditure 574 520 -9.3%
Operating Profit (EBDIT) 78 114 47.1%
Operating Profit Margin (%) 11.9% 18.0% -
Interest 2 12 555.6%
Depreciation 37 45 22.1%
Profit before Tax 39 62 60.9%
Tax 15 21 35.7%
Extra-ordinary item 56 - -
Profit after Tax/(Loss) -33 41 -
Net profit margin (%) -5.0% 6.5% -
No. of Shares (eoy) (m) 13.9 13.9 -
Diluted Earnings per share* - 11.9 -
P/E (X) - 5.1 -
*(annualised) - - -

During the quarter, the company managed to add 12 new clients, which has taken the number of active clients to 95. The top five clients accounted for 30% of the revenues and contribution of these clients to the revenues was 46%. These numbers compare well with client concentration figures of other companies. However, the cause for concern is that the company has only 13 clients that have annual billings of over US$ 1 m. Small size of projects tends to make clients less sticky (loyal). Mastek however, has a very encouraging ratio for repeat business, which stands at 93%.

This quarter Mastek managed to diversify its geographic concentration. The contribution to revenues from the US has declined from 38% in 4QFY01 to 32% 1QFY02. This was done by gains in contribution to revenues from other geographies like Asia Pacific and Europe. The contribution from Europe has grown significantly from 60% 4QFY01 to 55% 1QFY02. The contribution from Asia Pacific to revenues was 7% and that from the India region was 1%. The growth from the European geography might be a cause for concern in the future as the European economies too are slowing down, impacted adversely by the tough environment in the US.

It was very interesting to see Mastek’s moves in service offerings. The development business has shown a strong sequential growth of 9%. Consequently, the contribution to revenues has gone up from 38.8% 4QFY02 to 43.3% in 1QFY02. In contrast to the general trend in the industry, the company has in fact shown a decline in revenues from the maintenance area. The businesses domains for implementation and products also have shown de-growth.

Vertical wise the picture is very heartening. The company has shown strong growth from verticals like financial services, telecom and retail. However, the services vertical from which Mastek earns about 40% of its revenues has shown a decline. Thus the company has effectively managed to continue diversifying its vertical risk in the current quarter too.

Diversifying industry risk
% Contribution to revenues 4QFY01 1QFY02 Change
Financial Services 19.6% 27.7% 38.4%
Telecom 7.9% 13.5% 67.4%
Services 49.6% 40.5% -20.2%
Retailing 2.4% 7.8% 223.7%
Manufacturing 8.0% 10.4% 25.9%
Others 12.6% - -100.0%

Undoubtedly the performance during the quarter was a sober one, especially considering the uncertain and tough market conditions faced by the software sector. This is for the second consecutive quarter that the company has managed to perform reasonably well. Mastek’s management too has been very forthcoming with the disclosure regarding the financials. But against the backdrop over traditional concerns regarding the management ability to grow consistently, investors should wait for the management to prove its ability before considering Mastek as an investment option.

At the current market price of Rs 61, the stock is trading at a P/E multiple of 13 times its 1QFY02 earnings. The valuations might see a downside in the near future and are likely to remain range bound, henceforth.

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