Mastek: Carving A Niche

Building value through values is what first generation entrepreneurs or rather ‘professionals’ who entered the Indian IT scene in the early eighties, envisioned for Mastek in 1982. However, unlike other software companies that came into being at the same time, Mastek concentrated on the domestic market before moving on to the global arena. 

Products to services 



Mastek had to concentrate on domestic markets more due to compulsion and strategy than anything else. “Software exports were not dominant when we began operations. The company was small and we could not think of going global. Moreover, we came from a professional background and did not have contacts abroad to start a global business. So we thought that first we will make a mark in the domestic scene,” remarks Ashank Desai, CMD, Mastek. Incidentally, the first export was to Singapore as Desai explains, “The first visit I made abroad was after four years towards the end of 1986.” The company started off by working on projects and services for domestic companies along with customized software for its customers. In 1988-89, Mastek decided to go for products and received the first venture funding from TDICI to the tune of Rs10 crore. The reason for venturing into products manufacture was because in 1985 the Indian market realized the importance of PC products. Mastek decided to leverage on it by building products and competing with its counterparts in India and Asia-Pacific. Also, it decided that in order to make a mark, it was necessary to have a product. 

The transition came with the realization that if the company had to grow fast it had to become a player in the US and in the European markets. “And in these markets, product business is not an easy way. The best way to start over there is services,” confirms Desai, explaining the rationale behind the positioning of the company. It was one of the first software companies in India to come out with an initial public offer (IPO) in 1992. The confidence with which it ventured into the capital market became evident when Mastek came out with a premium of Rs60 on the par value of Rs10 per share in its IPO. The Government’s liberalization program and the subsequent opening up of Indian markets provided the much needed impetus for Mastek to go public. 

Interestingly, when the IPO opened, financial services were closed for a week and there was widespread apprehension about whether the issue could close on time and whether there would be demand for its scrip. “The last day, when the scrip was scheduled to close, there was a bandh and almost 40% of demand comes on the last day. Despite all this, our issue was oversubscribed,” exclaims Desai, recalling the tension and skepticism the company went through when it went public. 

Meeting global GA(A)P



Mastek also commenced its unique subsidiary business model of operations–the local-global model, based on creating global operations with local talent–in the United States. It was one of the first companies to have commenced this subsidiary model of business. As is the case with every new concept, Mastek’s new business model was also fraught with hurdles. First and foremost, considerable amount of investment was required for opening a subsidiary comprising many departments. Further, there was the issue of adhering to accounting and auditing practices of the countries where they were going to be set up. Moreover, it was found imperative to employ local people in these subsidiaries and pay them salaries commensurate with salary standards in the respective countries. 

The Indian accounting problems posed a lot of confusion regarding the consolidation of accounts. “It is only one year ago, that the concept of consolidation of accounts had become clear. Our US subsidiary has been following the US Generally Accepted Accounting Principles (GAAP) for the past seven years. But now we have consolidated it,” says Desai, commenting on the problems the company encountered when it decided to go for the subsidiary business model. 

As Desai remarks, “Mastek’s subsidiary model fits into the company model. The company works on a set of seven core values like open atmosphere, teamwork, customer intimacy, pride in work, delivery and commitment. There is complete autonomy for each of the subsidiaries and decision taking goes down to the lowest possible level.” Mastek has organized its business along strategic business units (SBUs). While SBUs have autonomy in terms of the business segment they address, they all subscribe to a common set of Mastek values–interdependence, building functional capability, authority matching responsibility, value addition matching authority, inclusion and involvement. Each SBU has its own management structure and controls its own virtual development center that may map into one or more physical development centers.

The business equation



Mastek offers a varied range of services across the board. Design and development new applications based on multiple platforms, re-engineering, migration and maintenance of legacy applications, development of interactive internet applications, euro currency conversion services, systems integration, collaborative outsourcing, ecommerce applications and customer relationship management (CRM) applications. It has always identified emerging technologies and leveraged on it. It detected an opportunity for products in India in 1983, it was relational databases in 1987, Windows as a platform in 1989, client-server technologies and ERP in 1990, internet in 1995 and CRM in 1996. CRM and ecommerce have brought in 40% of its revenues during the last two years.

 Mastek will continue to focus on improving relationships with customers. It does not plan to get into the hardware business, but the company will remain open to all changes and if needed, products will also be developed. “But it is highly unlikely that we may become a company doing only products. The business will continue to revolve around services,” says Desai, commenting about the company’s plans. With the rush for getting listed on the Nasdaq clearly on, Mastek is considering either taking the group as a whole to the hi-tech US bourse or just taking its US subsidiary. However, it is certain that Mastek, either as a group or in terms of its US subsidiary Majesco Software Inc, will get listed on Nasdaq by the end of the year. With corporate governance principles and adherence to the US GAAP well in place, it will not be difficult for Mastek to take the Nasdaq route. It is also bringing in external directors on its board as part of corporate governance. The other thing that is being discussed and considered is the stock split. Mastek shares are already dematerialized and the company, with the demat form coming, may either adhere to it or go for a stock split to increase the liquidity of shares. 

Performance matters 



 With a compounded annual growth rate of 50%, Mastek hopes to turn in a gross revenue of Rs250 crore for the 1999-2000 fiscal. It will not be a difficult task considering that Mastek posted Rs166.1 crore as gross revenue during the last fiscal. In keeping with its fast growth, Mastek posted a net profit of Rs7.21 crore for its second quarter (Q2) ending December 31, 1999, recording a 434% increase over the corresponding period the previous year. The group revenue rose to Rs60.75 crore, up from Rs35.80 crore, an increase of 70% over the same quarter last year. For the half-year ending December 31, 1999, Mastek posted a net profit of Rs13.92 crore, compared to Rs2.2 crore in the same period during the last fiscal. The group revenue stood at Rs121.59 crore, compared to Rs69.06 crore in the same period last fiscal. If one reviews the revenue streams, it is not difficult to comprehend that Mastek is in line to achieve its target of making Rs250 crore by the end of this fiscal. The group’s export revenue in Q2 of this fiscal grew by 73% over the corresponding period in the last fiscal, while the US revenue went up by 123%. The focus on front-end solutions in the areas of eCRM and ebusiness paid rich dividends and it accounted for 47% of the group revenue during Q2. In US operations, ecommerce accounted for 15% of the US revenue. 

Commenting on the performance of the company in Q2, Desai said, “The company has achieved excellent growth rate mainly because of the aggressive initiatives in ecommerce and CRM. Further, over the last three years, in any given quarter, the business from Y2K did not exceed 5% and in the last year, the Y2K business was less than 1%.” The company added 13 new customers in Q2, a significant number, in the area of ecommerce. It also got new assignments, which include a full cycle of projects for a leading aerospace company, another one for Adatom.com Inc and a business-to-customer oriented ebusiness company. It also bagged another project from a dot.com enterprise–CyberState University, where a virtual university has been put up on the net. 

After consolidation of accounts, Mastek’s earnings per share (EPS) shot up to Rs25.13 in the last fiscal from Rs5.12 during 1997-98. The book value of shares also reached Rs96.24 in the last fiscal, from Rs70.76 in 1997-98 and the market value to book value went up to 6.21 in the last fiscal, while it was 2.95 in 1997-98. If one takes into account customer satisfaction measures and link them with the amount of revenue that accrued to the company, it gives a clear indication why Mastek’s scrip has been doing well on the bourses. The last fiscal saw 76% of its revenue accruing from repeat orders from existing customers, with an 82% increase in billings from these customers. The revenue grew by 65% during the last fiscal along with gross earnings, which grew by 11% and return on capital, which grew by 27%. The company was able to add 30 significant accounts, with the share of the top 10 customers coming up to 55%. The deployment of workforce and its utilization was manifested when revenue per employee increased to Rs22 lakh, largely due to redeployment of domestic resources to exports. Also, Mastek was the first company that came out with an employee stock option scheme, way back in 1993. The current attrition rate of the company is 14%, much below the industry level and in Q2 of this fiscal, its annualized employee attrition rate has come down to 10%.

The last fiscal also saw a five-fold increase in infrastructure investments as well as a 300% increase in development center capacities. The geographical coverage increased with the establishment of a new subsidiary in Germany, a branch in Japan and three new branches in the US. The ‘global governance’ structure that was to become more local, more global, paid rich dividends. The percentage of revenue from international operations increased from 55% in 1997-98 to 97% in 1998-99.

Mastek’s success script



The entire company has been shored up with the consolidation of accounts and with its accounts for the Mastek scrip doing well on the bourses. Today, it is one of the top 5 IT scrips in the country. While the scrip was ruling below the four-figure mark during June 1999, within six months it scaled a whole-time high of Rs6,000 plus. With market corrections taking place, the share price has come to stabilize around Rs4,000. While the general trend of IT scrips riding high cannot be discounted, the major reason has been the fast growth rate and consolidation of accounts of the group. It has been constantly moving up the value chain and as Desai says, “To achieve our targeted growth and meet increasing customer expectations, we need to build capacities and capabilities in infrastructure, technologies and processes. On all these fronts, Mastek has initiated steps that will ensure that we are well prepared.” 

As Kenji Miyazawa declares in the Zen Philosophy, “When spring comes, ice and snow melt, and rivers are filled with spring waters running in four directions: north, south, east and west.” The implication of this proverb is that, after one obtains self-realization, self-confidence and self-reliance, the negative ice and doubtful snow melt, and one can offer oneself to others. This is exactly what Mastek has destined for itself after 18 years of existence.

Rajesh Menon



in Mumbai