Operating cash inflows registered sharp growth.

The contribution to revenues from the US was the only factor that enabled Mastek report growth in revenues and earnings for the quarter ended December 2002.

The more than 50 per cent revenue growth over the quarter ended September 2002 helped US operations (which recorded losses in the July-September quarter) swing back into profitability.

This compensated for the decline in profitability of all other segments, including that of the joint venture with Deloitte Consulting. Profits from the UK operations — major contributor to the bottomline in the year ended June 2002 — fell 25 per cent.

Interestingly, Mastek was able to restrict growth in operating expenses vis-à-vis revenues. Gross profits rose 12.2 per cent, reflecting the less-than-proportional rise in operating expenses. However, the sharp jump in depreciation costs, mainly because of investments in offshore infrastructure facilities, pulled down profit growth.

Promisingly, operating cash flows recorded a sizeable growth during the quarter, aided by lower growth in operating expenses and control over debtors.

Cash on hand with Mastek at Rs 74 crore is now around 52 per cent of its net worth. How the cash is used will also have a significant bearing on the valuation accorded to Mastek.

Low growth ahead

Mastek has also revised its earnings guidance for the year-ended June 2003 to between Rs 64-68 crore.

This is a wide range, given that Mastek recorded profits of Rs 31.51 crore in the first half ended December 2002. Sequential earnings growth guidance is between 3 per cent and 16 per cent.

Still, there is reason to believe that the earnings growth will be at the lower end of the indicated target band. This is because of the challenges faced by mid-size companies such as Mastek, which have to be contend with relatively modest growth. Only large companies appear to be in a position to tap the potential offered by offshore contracts.

Moreover, even if Mastek remains successful and is able to notch double-digit quarter-on-quarter revenue growth, it is only likely to be volume-driven.

In other words, margins may remain under pressure and the profit growth restricted. Given this backdrop, the price-to-earnings multiple of nearly 13 appears high.

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