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Mastek: Making Confident Moves

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DQI Bureau
New Update

Growth is a critical factor in the software services sector from

a number of perspectives. First, it allows software companies to reach out to

large corporations that are increasingly looking at working with larger vendors,

as opposed to smaller vendors. It also improves the margins, as marketing

overheads are largely fixed and any improvement in revenues directly improves

the overall margins. And importantly, it also allows companies to plan careers

for its staff and manage the attrition rates.

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The success of TCS, Infosys, and Wipro has been largely a result

of the big three dovetailing their strategies around a strong growth objective.

However, among the second tier companies, growth has been somewhat sporadic and

has led to volatility in sales and profits in the past. Mumbai-based Mastek has

now embarked upon an ambitious expansion plan that shows a strong management

confidence in its future prospects.

FACT

SHEET
Website:

www.mastek.com
#106/107,

SDF IV, SEEPZ, Andheri (East), Mumbai 400 096
Tel

+91 —22 2829 0635 Fax +91 — 22 2828 0557
Area

of Specialization:
software development, maintenance, systems

integration and product implementation
Consolidated

Revenues (June 2005):
Rs 414.2 crore
Offices:

India, USA, UK, Germany, Singapore, Malaysia, Hong Kong and

Japan
Listing

(Stock Exchanges):
BSE and NSE
Face

Value:
Rs 5 per share
Current

Market Price (Rs):
510
52-Week

High/Low (Rs):
513/ 307
BSE

Code:
523704
NSE

Code:
MASTEK

Founded in 1982 by a group of four IT professionals as

Management and Software Technology Private Limited, it is a provider of IT and

BPO services like application development and management, legacy modernization

and migration, enterprise application integration (EAI), and field expansion.

Mastek specializes in finance, telecom, government, education, insurance,

telecom, manufacturing, and retail domains. Mastek has presence in eight

countries, along with five development centers in India.

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Gone public in December 1992, the equity of the company at the

end of quarter ended June 2005 stood at Rs 6.9 crore, with the Indian promoters'

holding at 42%, institutional investors' at 40%, Indian public's at 13%, and

the balance 5% by other investors. Ashank Desai is its chairman and managing

director while Sudhakar Ram is the CEO.

Mastek closed the year ended June 2005 with consolidated

revenues Rs 414.2 crore, up 4%, as compared to Rs 400.3 crore in the previous

year. Revenues from its development offering grew 30% to Rs 318 crore, as

compared to Rs 244 crore in the previous fiscal. The maintenance segment earned

Rs 147.9 crore, up 41% as against Rs 105.1 crore in the previous fiscal.

Revenues from the government vertical were up 87%, to Rs 186 crore. Finance and

education vertical earned revenues amounting to Rs 231.5 crore and Rs 26.5 crore,

registering an increase of 43% and 23% respectively, as compared to the previous

year. However, revenues from the telecom, retail and manufacturing verticals

declined 62%, 63% and 18%, to Rs 4.7 crore, Rs 2.2 crore, and Rs 14.6 crore

respectively. The net profit for the year stood at Rs 38.7 crore, up 33% over

the year-ago period.

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As part of its future expansion plans, Mastek has set up a new

development center in Pune. The 55,000 sq ft center has a seating capacity of

550 professionals. It also plans to expand its activities in Pune. The company

claims that the launch of new development centre is a step towards fortifying

the company's commitment to Pune, and offering enhanced value through

attractive and contemporary improvements.

During the quarter ended September 2005, Mastek reported an 18%

y-o-y increase in the revenues, to Rs 150.6 crore, as compared to Rs 128.1 crore

in the year-ago quarter. The highlight of this quarter was the Rs 54.3 crore

contribution from the government vertical, up 64% on a y-o-y basis. The

contribution from this vertical now almost equals that of its finance vertical.

The finance vertical's contribution stood at 45%, at Rs 55.2 crore, up 15% on

a y-o-y basis. The North American operations continued to improve its

contribution, led by a general improvement in US economy and an increased

management focus on the region. The US operations contributed 18% of revenues,

up from 15% share in the last quarter. During the second quarter, Europe was the

largest contributor at 60%. The company registered an increase in net profit

amounting to Rs 15 crore, up 2% sequentially, as compared to Rs 14.7 crore. As

compared to the same quarter in the previous year, the net profit grew 24%, as

compared to Rs 12.2 crore. The quarter also saw a general improvement in margins

as the company was able to utilize more internal staff to reduce its dependence

on outside agencies.

Consolidated

Financials 
  2004 2005 2006* 2007*
Sales 400 414 597 656
Other

Income
11 7 7 8
Operating

Profit
47 65 97 112
Operating

Profit Margin (%)
12 16 16 17
Net

Profit
29 39 55 70
Equity

Capital
7 7 7 7
EPS

(Rs)
21 28 40 51
*

Projected

Year ended

30th June

Note:

All figures in Rs crore unless indicated otherwise. All

figures are rounded-off
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As compared to the same quarter of the previous year, Mastek's

active clients declined by seven to 49. However, 93% of its clients have a

potential to contribute more than $1 mn per annum. While the top 5 clients

contributed 66% of the total revenues, the top 10 contributed 84% in the quarter

ended 30 September 2005. Mastek's total staff strength currently stands at

2,951, compared to 2,466 a year back, signifying a steady headcount growth, with

the expansion of its Mhape facilities in Mumbai.

Going ahead, for the quarter ending December 2005, Mastek

expects the consolidated revenues to be in the range of Rs 159 crore and Rs 164

crore and net profit between Rs 15.3 crore and Rs 16.3 crore. The company

expects a better growth in fiscal 2006 across other geographies, especially the

US, which should help in increasing its net margins. While improving margins and

geographical distribution of revenues are positive signals, its relatively low

profitability continue to be an area of concern.

Mastek currently trades at Rs 510, discounting its estimated

June 2006 EPS by 13 times and June 2007 EPS by 10 times. While Mastek is a

relatively small player in the software services arena, its ambitious growth

plans and excellent performance in the second quarter merit it another look.



Market Performer.

Sushanto Mitra

The author is the founder of Technology Capital Partners The views reflected

here are of the author and not of this publication. No liability is accepted for

losses based on the information presented here

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