Mastek: Leaving Choppy Waters Behind

If there was one thing that was synonymous with Mastek’s performance, it

was unpredictability. The company’s performance in the past has been volatile

due to its inability to perform in key growth markets. However, this seems to be

a thing of the past as Mastek reworked its strategy in the past six quarters

during which it witnessed slowdown in its performance. ‘Investing in

Relationships’ is the motto of Mastek and this is bearing fruit as is evident

from the performance in the past two quarters.

Mastek was founded by a group of four IT professionals Mr Ashank Desai, Mr

Ketan Mehta, Mr Sudhakar Ram, and Mr R Sundar in 1982 as Management and Software

Technology Private Limited. Mastek got its present name in 1992 when it became a

public limited company. The company went public in December 1992 offering shares

at a premium of Rs 60 per share. In its early years of operations, the company

was engaged into selling packaged software for Financial Services and Enterprise

markets. The company shifted its focus to the South East Asian markets after

poor performance of packaged software business. But the economic recession in

the South-East Asian region changed the company’s focus towards the west in

the UK and US. In the last six years Mastek’s operations have gradually

shifted from the domestic markets to the overseas markets. Mastek today achieves

major revenues from the US and European market and expects sustainable growth

from these regions.

Mastek is a leading software services companies in India providing range of

software services such as Software Development, Maintenance, Systems Integration

and product implementation, which includes Customer Relationship Management

implementation. Mastek specializes in the finance, government, telecom and

retail domains. Mastek closed the year ended June 2002 with consolidated

revenues 286.89 crore and net profit of Rs. 41.70 crore, up 10% and 394%,

respectively.

Software Development formed more around 58% of the company’s revenues in

year ended June 2002 with revenues from maintenance at 28% and that from product

implementation at 13%.

Mastek formed a JV with US$ 3 billion Deloitte Consulting wherein Mastek

holds 50.1 percent stake. The JV–DCOTG–provides offshore services to the

customers of Deloitte Consulting and its clients in the area of application

development, maintenance, data warehousing, middleware implementation and

support, Siebel development and reverse engineering of legacy application. Most

of the clients are Fortune 1000 companies in the manufacturing, health care,

motor vehicle, computer manufacturer and telecom industry largely based in US,

Canada and Australia.

During the year ended June 2002, Mastek witnessed a decline in the revenues

from the US geography, which dipped from 32% of total revenues in the first

quarter ended September 2001 to 21% of the revenues in the fourth quarter ended

June 2002. The decline was due to the company’s revised strategy in the

American market to focus on key and strategic clients.

Mastek exited some of the smaller single project clients and the

rationalization seems to be paying off in the current year.

Mastek strengthened its marketing efforts in US to target fortune 1000

clients that would allow it to bid for large and long-term projects. The

performance in the first half ended December 2002 reflects the success of this

strategy as the contribution from US to total revenues have jumped

significantly.

Mastek reported excellent performance in the second quarter ended December

2002. Mastek’s consolidated revenues were up 5% q-o-q and 47% y-o-y to Rs.

95.79 crore whereas its net profit was up 7% q-o-q and 165% y-o-y to Rs. 16.26

crore. Mastek’s operating margin improved marginally from 20% in the first

quarter to 21% in the second quarter. Revenues from the finance domain jumped

33% sequentially to Rs. 29.91 crore and formed 33% revenues. Government related

revenues declined 3% to Rs. 27.09 crore but formed 30% of total revenues.

Telecom revenues formed 6%, Retailing formed 2% and Manufacturing formed 4%

whereas other IT services formed 21% of the second quarter revenues.

In terms of geography, Europe continues to contribute more than half of the

revenues although the share has declined in the second quarter. Revenues from

Europe stood at 56% of total revenues compared to 60% in the immediate previous

quarter.

European revenues declined by 2% sequentially from Rs.55.01 crore to Rs.

53.96 crore. The poor performance was due to the slowdown in the Germany. On the

other hand, share of revenues from US geography increased sequentially from 26%

to 31%. Excluding the JV share, the revenues from US grew form 13.1% to 20.3%

sequentially. Company expects the substantial growth to come from the US market.

Asia Pacific and India contributed to 7% and 2% respectively with 5% coming from

Joint Venture efforts. Revenues from US grew 24% sequentially to Rs. 29.52 crore

and that from JV’s by 25% to Rs. 4.43 crore.

Going ahead, Mastek has revised upwards its net profit guidance to Rs 64-68

crore. The company is excited about the US prospects and expects predictable

revenues growth from this geography. Mastek is confident of expanding

relationship with more major clients, which would improve revenue visibility and

curb the volatility in its performance. After putting a long term strategic plan

for US and successfully operating the joint venture with Deloitte Consulting,

Mastek now plans to provide Business Process Outsourcing services. The company

would operate the BPO through a 100% subsidiary named as Mastek

BPO Pvt. Ltd with an initial capital of Rs 10 crore and will operate from

Thane. Mastek plans to provide services that are a strategic fit to their area

of operations and would target its existing major clients.

We expect Mastek to close the year ended June 2003 with revenues of Rs. 405

crore and net profit of Rs. 64.68 crore and grow by 30% and 35% respectively in

June 2004. Mastek’s operating margins are expected to remain stable for the

next few quarters as the company would see higher spend after expansion and

initial onsite operations as it signs up new clients.

Moreover, the slowdown in the European market may have some impact on Mastek’s

performance in the medium term.

Mastek currently trades at Rs. 582 discounting the estimated June 2003 EPS by

13 times and June 2004 by 9 times.

Mastek’s share price has gained over 54% in the past 4 months on the

announcement of excellent quarterly performance. In the past, Mastek has failed

to meet its guidance on a number of occasions. Moreover, Mastek’s failure to

operate in the largest IT market was also seen as a negative since a number of

Mastek’s peers and even smaller companies were able to generate substantial

revenues from this region. Mastek is confident of creating a major dent in the

US market, which would enable it to post sustainable performance. We feel Mastek

is on track to achieve its goals and its share price would firm up as it

announces results. Market Outperformer

Sushanto Mitra is the founder

of Technology Capital Partners