Large sized deal ramp-up due to Evosys acquisition – MASTEK

Update on the Indian Equity Market:

On Tuesday, the benchmark Nifty 50 index ended at a record closing of 17,383 (+0.2%). The top gainers on the index were INDUSINDBK (+4.0%), HCLTECH (+2.5%), and HEROMOTOCO (+2.2%). The laggards were led by ULTRACEMCO (-1.1%), HDFC (-1.1%), and BPCL (-1.1%). Among the sectoral indices, MEDIA (+14.4%), PRIVATE BANK (+1.1%), and CONSUMER DURABLES (+0.9%) led the gainers while METAL (-0.4%), FMCG (-0.3%), and FINANCIAL SERVICES (-0.1%) led the losers.

Excerpts of an interview with Mr. Hiral Chandrana, Global CEO, Mastek with Economic Times on 13th September 2021:

  • The Company has a strong business in the UK and is working with the leading public sector institutions. MASTEK has a healthy business and is not going to reduce its UK exposure. They expect to continue the run in many areas including the private sector.
  • 1QFY22 was a good quarter in terms of the order book. The company is witnessing a good momentum in 2QFY22 along with an increase in deal size. The acquisition of Evosys (cloud business) is helping MASTEK get involved in larger-sized deals.
  • There are delays in some deals due to their large size and higher competition.
  • While the talent market remains challenging, MASTEK has taken a lot of steps in terms of salary hikes and skill transformation. They are looking at various elements of how training and reskilling are done.
  • 12-15 months back, the company was operating in the 13-14% EBITDA margin range. Now, they are comfortable in the 20plus percentage EBITDA margin. While there could be some margin fluctuation on a QoQ basis, the CEO believes they have good leverage in terms of fixed cost to achieve margins in the 20% plus range.
  • In some of their cloud implementation business, which was acquired through Evosys, the work is delivered through business outcomes. There are elements of pricing and realisation that can be leveraged based on the outcome delivered.
  • In cases where skills-based work is in high demand, customers realise they need to pay more. There are certain skills for which the company can command higher prices.
  • Customers are going through digital adoption and they are changing business models. They are changing their supply chains. It is a huge transformation and technology is a big enabler. Mr. Chandrana believes this trend will continue at least for the next one and a half or two years.
  • There is a huge opportunity for automation and digital adoption. Cloud has taken off in a big way, and MASTEK is investing heavily in that space for the next 18-24 months.

Asset Multiplier Comments

  • MASTEK’s presence in the local government has been established through the Evosys acquisition. There could be new business opportunities for the company with the UK government as a result of Brexit.
  • A strong order book, ramp-up of large deal wins, revival of the UK and US businesses are indicative of the revenue growth for MASTEK in the near term.

Consensus Estimate: (Source: market screener website)

  • The closing price of MASTEK was ₹ 2,899/- as on 14-September-2021. It traded at 31x/ 25x the consensus earnings estimate of ₹ 94/ 114 for FY22E/ 23E.
  • The consensus target price of ₹ 2,890/- implies a PE multiple of 25x on FY23E EPS of ₹ 114/-.

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