Mastek Ltd – Mid Tier It Player

Company Name – Mastek Limited (Mastek)

Current Share Price – INR 2,827 (April 21, 2022)

Market Cap – INR 8,485 cr

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[Updated for FY22 results]

1. What is interesting about the stock?

India's information technology (IT) industry has been instrumental in putting the country on the international map. In addition to powering India's economy, this industry has a positive influence on the lives of its residents by directly and indirectly contributing to several socio-economic factors like employment, standard of living, and diversity. India's massive Information Technology business includes information technology services, consulting, and outsourcing. By 2020, the IT industry accounted for 8% of India's GDP. Despite the possible impact of the Omicron version, Indian firms are likely to spend INR 79,226 crores (USD105.2 billion) on the IT sector in 2022, up 5.5% from 2021.

(Source: ET)

Mastek began as Management and Software Technology Private Limited, a company that designed and delivered computer software, on May 14, 1982. The firm released the first Indian software application in 1985. Majesco was another subsidiary of the company that sold insurance goods. Later, in 1992, the name of the company was changed to Mastek. Majesco, Mastek's insurance division, was demerged in 2014. Mastek is a global enterprise digital transformation expert with customers in 41 countries. By unlocking the potential of data, transforming applications, and driving digital advantage for its customers, Mastek helps them navigate the IT and business landscape and stay competitive. Cloud Native & Application Development, Digital Experience & Commerce, Oracle Suite & Cloud Implementations, Next Generation Managed Offerings, Automation & AI, and Digital Consulting are some of the company’s unique digital and cloud services that help customers achieve business goals. The company's business strategy is sound, and it has a strong long-term relationship with its clients, as seen by FY22 revenue of Rs 2,184 crores, rising 60.7% on a year-over-year basis.

Mastek acquired Evosys in 2019. With over 1,200 Oracle Cloud clients, Evosys is an Oracle Platinum Partner and a prominent Oracle Cloud installation and consulting firm. The acquisition of Evosys was a game-changer for Mastek as it brought cross-sell opportunities with it. In addition, the merger enabled them to provide end to end digital transformation and cloud migration services.

Mastek’s UK and European business brings approximately ~70% of the revenue. Further, in the UK business, 70% of it constitutes the public sector and 30% private sector. The Company has a long-standing relationship with the UK government as it was working as a subcontractor to large IT companies to execute government orders. Mastek has delivered 95% of projects on time. As a result, gradually, it started winning contracts directly. Mastek is a member of government frameworks in the United Kingdom, including G-Cloud, Digital Outcomes, and Specialist (DOS). Mastek continues to provide vital national infrastructure projects such as Home Office Biometrics, Immigration Platform, and the National Health Service's 24x7x365 Care through these frameworks. In FY21, the UK & Europe companies earned total operating revenue of INR 1,161 crores, up from INR 772 crores in FY20, a 50% increase.

Total operating revenue from USA was INR 288 crores in FY21, up from INR 249 crores in FY20, representing a 15.5% increase. The Company is trying to get contracts with some of the local governments in the USA. In addition, the firm signed a Cloud Managed Services deal with a well-known in-home healthcare service provider in the United States. Mastek will work with the customer to develop a clinically driven operating model and supply a comprehensive healthcare solution. Company is looking to increase the US business to ~34% of the revenue.

Mastek concentrates on the development goals to help the firm expand, develop domain expertise across verticals, develop specific skill sets, and enhance its worldwide delivery strategy, all of which help to increase service, product upgrades, and profits. About 2,200 people work for the organization across 11 locations in the United Kingdom, the United States, and India. In addition, Mastek recently opened a new office in Romania for European clients.

Key Strengths

• Mastek's strength comes from its work with the UK government due to its sticky contracts, and Mastek has a lot of experience with them.

• Consumers will have access to a wide range of digital transformation services as the company expands its business intelligence & analytics capabilities, Quality Assurance Automation, and Robotic Process Automation.

• Oracle is another major strength of Mastek. Oracle ERP is gaining market share from SAP ERP, bringing extraordinary growth to Mastek.

• Mastek has established a presence in the United Kingdom, Europe, the United States, Asia Pacific, the Middle East, and India during the last three decades. As a result, the company has access to a broad worldwide addressable market to expand.

• Last but not least, the Management staff has a lot of experience.

Key Weaknesses

• To compete with hyperscalers, the company must scale beyond Oracle.

• As previously said, the corporation is overly reliant on its UK operations, particularly in the public sector.

• Market attrition is a significant source of concern for the whole business. Project completion may be impeded, and bench strength may be underutilised if talent moves continually. Mastek's overall attrition in FY2021 was 14.3%.

The company is facing competition from other IT Services & Consulting firms:

• Tata Consultancy Services (TCS) - an Indian multinational information technology services and consulting organization, has developed TCS Clever Energy, Intelligent Power Plant (IP2), and TCS Envirozone on Microsoft's Azure IoT platform.

• HCL Technologies Ltd. (HCL) - expanded its strategic transformation partnership with ams OSRAM to computerize one of the optical solutions leader's core business activities.

• Wipro Limited - a global leader in information technology, research, and process management services, has offered semiconductor engineering services to the world's most prestigious organizations for over 30 years. As a result, Wipro now works with 80% of the world's leading semiconductors and three-quarters of the world's leading hyperscalers.

Hiral Chandrana, a former Wipro executive, was hired as Mastek's worldwide CEO in July 2021. Hiral, who has a proven track record of leading and growing digital transformation business, will be based out of the US.

2. Key Historical Financials

In Q4 FY22, the company's revenue from operations was INR 582 crores, up 5.4% from the previous quarter and 20% from the prior year. In addition, in Q4 FY22, the company’s operational EBITDA was INR 121 crores, increasing 4.3% quarter-on-quarter and 14% year-on-year. In Q4FY22, there were 450 active clients, compared to 421 in Q2FY22. Company had a net cash balance of ~ INR 600 cr as of March 31, 2022.

For FY22, operating revenue climbed by 27% to INR 2,184 crs from INR 1,722 crs in the previous year. Company delivered a robust quarter and financial year driven by our continuous focus on digital engineering & cloud transformation services. On a consolidated basis, Mastek produced operating EBITDA of INR 463 crs, or 21.2% of operating revenue, during the year, compared to INR 364 crs, or 21.1% of operating revenue, the previous year. Margin is expected to be under pressure from competition to attract/retain talent leading to salary increase. Attrition is 28% in last twelve months.

3. What is my view on company valuation?

Over the previous five years, the company has had a profit increase of 31% CAGR. In addition, Mastek's net income grew quicker than the industry average of 55%.

Mastek has a high P/E (TTM) Ratio (29x). Other IT - Software peers like TCS, Infosys, HCL Tech, and Wipro trade at P/E (TTM) of 35x, 31x, 22x and 24x, respectively. Long-term P/E (5 year average) ratio of Mastek is 13x.

The Company’s ROE is 31%.

Company looks interesting for investment in long term and investors should evaluate at P/E multiple of around 20-25x.

4. What are the risks to the investment analysis?

• The majority of the company's activity is in the public sector. This is a significant issue since protectionism is rising in several economies, including the United States, the United Kingdom, Australia, Singapore, and others. As a result, any changes in immigration laws or local rules might influence the company's profitability and growth

• Mastek's primary invoicing currencies, such as GBP, USD, Euro, and AUD, have experienced considerable fluctuations, resulting in significant changes in revenues and Forex losses and gains

• The IT industry has become so vast and complicated that it has increased the threat of competition, notably from technical behemoths from India and others. Also, the threat of technological obsolescence is perennial in this business

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About the Author

I write about the stock market, cryptocurrency, blockchain. I have Bachelor of Arts degree with more than 10 years of experience in finance and cryptocurrencies.

Disclosure

I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.