Centrum Broking

Mastek (Buy)

CMP: ₹354.5

Target: ₹565

Mastek is an IT services provider with revenue of $148mn in FY19 and a headcount of 2,035 employees. The company predominantly focuses on the UK Geography (about 71 per cent of revenues). Within verticals, it has strong competency in government/ retail/ financial services, which account for 40 per cent/38 per cent/16.5 per cent of revenues respectively.

Under the leadership of John Owen (CEO effective November 2016), Mastek delivered 25 per cent/16.5 per cent organic dollar revenue growth in FY18/FY19 respectively. However, weak 1QFY20 and the Brexit-led uncertainty has led to medium-term slowdown and hence, we build 1.5 per cent dollar revenue decline for FY20E. However, company is well poised to capitalise in the post Brexit scenario and we anticipate acceleration in dollar revenue growth to 14/15.5 per cent in FY21/FY22E.

Net cash on balance sheet stands at ₹180 crore (21 per cent of Mcap). Mastek has 11.2 per cent stake in Majesco USA (valued at ₹280 crore), which it aims to monetize in the medium term. Real estate monetisation would also contribute to additional ₹50 crore. Hence, a strong balance sheet (₹510 crore cash and monetisable investments which is 59 per cent of market cap) protects downside.

The stock is trading at around 7.4x FY21E EPS and valuations are cheap. While FY20 could be a challenging year owing to weak start, we expect revenue growth acceleration in FY21/FY22E.