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.
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.
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.
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.
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.
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.
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