Sample  write-ups  
 Mastek   
Vol. No. : 19    Issue No. : 36                             Wednesday, February 10, 2021

Steadily built digital transformation capability

Strong digital transformation capability further enhanced by Evosys acquisition will help the company to tap growing digital transformation opportunity globally either by acquiring new logos with joint go to market strategy or increasing wallet share from existing client on the back of its strong client relationship.


Idea

Mastek

BSE Code

523704

BSE Group

A

NSE Code

MASTEK

ISIN Demat

INE759A01021

Bloomberg

MAST@IN

Reuters

MAST.BO

Par Value

Rs 5

52-week High/Low

Rs 1460 / Rs 170

Current Price

Rs 1110 on BSE and Rs 1108  on NSE
(as on 10 Feb 2021)


Mastek (formerly known as Management and Software Technology Private Limited), is an IT company providing enterprise solutions to the Government / public sector, retail sector and financial services. Mastek’s portfolio includes business and technology services, comprising IT consulting, application development, systems integration, application management outsourcing, testing, data warehousing and business intelligence,application security, customer relationship management (CRM) services and legacy modernisation.

As end of Dec 2020, the company had a total employee strength of 3602 (up from 3354 as end of Sep 2020) and of which about 2541 were based offshore in India while the rest were at various onsite locations.

Transformed from being an offshore IT service provider to being a Digital Transformation partner of choice

Mastek over the course of three decades evolved from being an offshore IT provider to an agile, digital transformation partner with a portfolio of leading companies, engineering excellence for customers globallytodayspanning Government, Healthcare, Defense, Retail, Financial Services and more verticals across the matured markets of UK and USA. The company’s current capabilities include application development, application maintenance & support, ERP & Cloud migration, business intelligence & Analytics, agile consulting, assurance & testing and Digital commerce.

As end of March 2020, the company has 106 customers in government & health sector; 321 customers in commercial sector; 9 educational institutes. The company has added 53 new Logos in FY20.

Further the company has added 57 new clients in Q3FY21 taking the total client count as of December 31, 2020 to 618 (LTM) as compared to 542 (LTM) in Q2FY21.

The company has a strong track record in the Government, health and retail verticals with each generating 34%, 19% and 19% of the total sales, respectively, in H1 FY2021. Certain critical departments such as the Home Office and Health (where Mastek already has successful relationships) are expected to have a bigger share of IT spends to support changes in the existing systems and create new systems post Brexit, which will provide significant growth opportunities for the company. In addition, strong presence of Evosys in the local UK Government could help Mastek access some new departments of the UK Government in the medium term.

The company has strong client relationship with about 98.7% of its revenue come from existing clients.

Furthermore, it generated approximately 46% of its revenues in Q2 FY2021 from the top ten clients.

Evosys acquisition provided immediate addressable opportunity and reduced geographical concentration risk

Mastek that got 96% of its revenue in FY2016 from UK has reduced its geographical diversification through acquisitions. The company has acquired TAISTech in Dec 2016 and rebranded it as Mastek Americas.

The company latter on Feb 2020 has acquired Evosys and at present, the first leg of the transaction involving cash buyout of Evosys Middle East business has already been completed. However, the second leg regarding the acquisition of the overseas business of Evosys through demerger cooperation agreement and shareholders agreement is awaiting regulatory approvals.

Evosys has a proven business model to deliver EBS implementation for its customer and migrate them to cloud solutions using its unique IP. This, coupled with Mastek’s bespoke service offering and delivering reputation, creates an ideal opportunity for customers to accelerate their digital transformation and extract more value from all their digital assets: current, legacy and future.

This accretive acquisition allowed the company to diversify its geographic concentration, leverage the customer acquisition velocity that Evosys brings, and provide an immediate addressable opportunity to increase its share of wallet and deliver more value for its customers.

The share of UK to the topline of the company declined to 72% in FY2020 from 96% in FY2016 with TAISTech acquisition, which has further dipped to less than 66% in H1FY2021 with the acquisition of Evosys in Q4FY2020.

Mastek, after the acquisition of TAISTech, has a presence in digital commerce enabling implementations and support for the Oracle ATG and Oracle Commerce Cloud applications. Further, the acquisition of Evosys in Q4FY2020 enhanced its addressable market in Middle East, US, Continental Europe and the local government of UK through cross-selling and up-selling of Mastek’s service offerings.

With ongoing integration of Evosys, the company is well on its way to achieve both financial and strategic value from the deal.

At present, UK and Europe contribute to 66% of the overall revenues in H1FY2021, followed by the US and Middle East with revenue contribution of 17% and 12%, respectively. Moreover, in Q2 FY2021, the top 10 customers contributed to 46% of the revenues compared to 63% in Q3 FY2020 (pre-acquisition of Evosys) leading to higher customer diversification with the acquisition of Evosys.

Improved order book

Order book of the company in Rupee terms as end of Dec 2020 stood at Rs 946.7 crore, a growth of 1%QoQ and 101%YoY. On CC terms the order book at USD 125.5 million was down by 2.3%QoQ and up 93.9%YoY.

The acquisition of Evosys provides Mastek access to the value-accretive and fast-growing cloud ERP market and further integration of the same is expected to provide cross-sell opportunities, which will support its revenue growth. The company signed the third large deal worth USD 1.8 million under a joint go-to-market strategy post the acquisition.

The organic growth is mainly contributed by the UK public sector with higher revenue visibility following clarity on the Government spending.

The company expects the government sector spends over about GBP 12 billion per annum in the IT services and software space. Within this, Mastek services three of the top four UK public sector spenders (central, local, healthcare and defence). Hence, the management remains confident on delivering strong growth in UK public segment as it focuses on deepening existing relationships and widening the customer base by adding new logos. Growth momentum in Evosys business would continue on the back of large opportunities in the cloud-migration space, strong order booking, a healthy deal pipeline, and market share gains from competitors and led by a dedicated sales team to migrate customers from SAP to Oracle cloud.

Strong performance in Q3FY21 led by organic growth as well as Evosys

For the quarter ended Dec 30, 2020 the consolidated revenue (in US dollar terms) stood at USD 60.1 million, a growth of 9%QoQ and 76%YoY. But on constant currency terms the revenue grew by 7.3%QoQ and 73.9%YoY. On Rupee terms, the revenue at Rs 442.85 crore was up by 8%QoQ and 82%YoY. Revenue of Evosys, which was acquired in Feb 2020 was Rs 156 crore, a growth of 9.5%QoQ. Thus the organic growth of Mastek at Rs 286.80 crore, a growth of 7%QoQ and 18%YoY. As OPM expand by 240 bps to 23.5%, the operating profit jumped up by 20%QoQ to Rs 103.86 crore. The PBT was up by 23%QoQ to Rs 94.31 crore after accounting for lower OI, lower interest and higher depreciation. The taxation was up by 35% to Rs 24 crore and thus the PAT was up by 19% to Rs 70.31 crore. The MI was up by 57% to Rs 12.89 crore and thus the net profit was up by 13% to Rs 57.42 crore.

Revenue for the nine month ended Dec 2020, was up by 69% to Rs 1238.65 crore with revenue from Evosys stand at Rs 432.3 crore (nil in 9mFY20)and that of Mastek up by 9.7%to Rs 806.3 crore. With OPM expand by 770 bps to 20.9%, the operating profit was up by 166% to Rs 258.53 crore. After accounting for higher OI, higher interest and higher depreciation, the PBT was up by 139% to Rs 242.12 crore. After accounting for higher taxation (up 232% to Rs 66.08 crore), the PAT was up by 135% to Rs 176.04 crore. With MI being share of profit being Rs 18.20 crore (compared to nil), the net profit was up by 99% to Rs 148.80 crore.

Net cash balance of the company after adjusting for debts as end of Dec 31, 2020 stood at Rs 520.9 crore which also includes Rs 237.1 crore ($32.3m) from sale of stake in Majesco.

Outlook

Sitting with strong order book, the joint go to market strategy between Mastek and Evosys will help the company to mine the existing client pool to increase the wallet share and add new Logos. Evosys expertise in Oracle cloud migration coupled with Mastek’s capability to cross-sell digital commerce and transformation services has helped the company win integrated and larger deals. With Brexit uncertainties over, the company is better placed to capitalise on the revival of UK government spending.

Return of travel cost, change in current offshore onshore mix and investment in digital capabilities as well as rise in manpower cost once normalcy returns will put pressure on margin. But the continued evolution of the company to be one of the leader in Enterprise Digital Transformation and investment in systems and process towards that will allow the company to capture and ride the current digital transformation wave.

Valuation

We expect the company to register consolidated EPS of Rs 84.8 for FY21 and Rs 94.1 for FY22. The scrip is trading around Rs 1110, which discounts the FY22 EPS by around 11.8 times.

Mastek: Consolidated Financials

 

1903 (12)

2003 (12)

2103 (12P)

2203 (12P)

Sales

1033.21

1071.48

1699.93

1954.92

OPM (%)

12.7

14.5

21.2

20.3

OP

131.54

155.36

360.01

396.85

Other Inc.

24.78

41.30

32.67

34.30

PBIDT

156.32

196.66

392.68

431.15

Interest

6.13

3.62

7.84

8.47

PBDT

150.19

193.04

384.84

422.68

Dep.

17.35

24.89

46.64

49.90

PBT

132.84

168.15

338.20

372.78

EO Exp

-0.55

24.07

0.00

0.00

PBT after EO

133.39

144.08

338.20

372.78

Tax

31.92

30.27

86.45

93.94

PAT

101.47

113.81

251.75

278.84

Minority Interest

0.00

4.95

40.24

44.26

Net Profit

101.47

108.86

211.51

234.58

EPS(Rs)*

40.5

51.3

84.8

94.1

* On Current Paid up equity capital of Rs 12.47 crore, Face value Rs 5.

Figures in crore

P – Projections

Source: Capitaline Databases


Mastek: Consolidated  Results

 

2012 (3)

2009 (3)

Var. (%)

1912 (3)

Var. (%)

2012 (9)

1912 (9)

Var. (%)

2003 (12)

1903 (12)

Var. (%)

Sales

442.85

409.74

8

243.68

82

1238.65

734.82

69

1071.48

1033.21

4

OPM (%)

23.5

21.1

 

13.8

 

20.9

13.2

 

14.5

12.7

 

OP

103.86

86.55

20

33.63

209

258.53

97.15

166

155.36

131.54

18

Other inc.

3.91

4.06

-4

9.55

-59

24.67

23.80

4

41.30

24.78

67

PBIDT

107.77

90.61

19

43.18

150

283.20

120.95

134

196.66

156.32

26

Interest

1.76

2.08

-15

0.80

120

6.34

2.48

156

3.62

6.13

-41

PBDT

106.01

88.53

20

42.38

150

276.86

118.47

134

193.04

150.19

29

Dep.

11.70

11.64

1

5.82

101

34.74

17.18

102

24.89

17.35

43

PBT

94.31

76.89

23

36.56

158

242.12

101.29

139

168.15

132.84

27

Tax

24.00

17.74

35

6.02

299

66.08

19.90

232

30.27

31.92

-5

PAT

70.31

59.15

19

26.01

170

176.04

74.87

135

113.81

101.47

12

MI

12.89

8.20

57

0.00

 

27.24

0.00

 

4.95

0.00

 

Net Profit

57.42

50.95

13

26.01

121

148.80

74.87

99

108.86

101.47

7

EPS (Rs)*

92.1

81.7

 

47.6

 

79.6

42.8

 

51.3

40.5

 

* On Current Paid up equity capital of Rs 12.47 crore, Face value Rs 5.

Figures in crore

Source: Capitaline Databases

EO: Extraordinary items

EPS is adjusted after EO and relevant tax

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