Mastek: Promises Met, Miles to Go Yet

Stockmarkets give a premium on companies whose earnings can be easily

predicted, which means that analysts can then make better valuation judgments on

buying and selling decisions. Consequently, companies that provide guidance for

future performance try their best to meet their numbers. Mumbai-based Mastek,

which had some trouble in meeting its guidance for a few past quarters, has met

its guidance for the quarter ended 30 September 2004 on both revenues and

profits. While this is a welcome change, the growth trajectory of the company

remains somewhat slower than that of its peers, and may not impress the stock

markets in the medium term. The key to a change in the overall situation depends

on the success of its US operations, which have been somewhat subdued in the

recent years.

Mastek closed the year ended June 2004 with consolidated revenues of Rs. 400

crore and net profit of Rs. 29 crore, up 7% and down 43% respectively.

Application development accounted for more around 69% of the company's

revenues for the year ended June 2004, with revenues from application management

maintenance standing at 29% and that from others at 2%.

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

Mehta, Sudhakar Ram, and R Sundar, in 1982, when it was called 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 the last six years, Mastek's

operations have gradually shifted from domestic markets to overseas markets.

Mastek today earns major chunks of its revenues from the European markets,

followed by US markets, both of which together contributed almost 75% of its

revenues.

During the quarter ended September 2004, Mastek witnessed a decline in the

revenues from the US geography, which dipped from a 22% share of total revenues

in the last quarter ended June 2004, to 21% of the revenues in the first quarter

ended September 2004. Revenues from Europe continued to rise, and reached Rs 71

crore, up 70% y-o-y.

Mastek reported improved performance in the first quarter ended September

2004. While Mastek's consolidated revenues were down 0.1% q-o-q, they were up

31% y-o-y to Rs 128.1 crore, whereas its net profit was up 9% q-o-q and 30%

y-o-y to Rs 12.2 crore. Mastek's operating margin declined from 18% in the

last quarter of last year, to 16% in the first quarter, led by the consolidation

of the results of Delloite Touche. Revenues from the finance domain jumped 4%

sequentially to reach



Rs 48.1 crore and formed 47% of revenues. The contributions from all other
verticals declined, signifying the increasingly sharper focus of the company.

During the quarter, the company secured a contract from MaxLife, New York,

for maintenance of channel management and collection management systems. In the

US, Mastek also received assignments from insurance customers for development of

claims management solutions and wrapper solutions around the legacy platform.

Also, during the quarter, its JV with Carreker Corporation announced a major

deal from a US corporation for BPO outsourcing.

Mastek's active clients declined by eight from the same

period last year to touch 56. Among these, 24 clients are fortune 1,000

companies. Whereas the top five clients contributed to 59% of revenues, the top

10 contributed to 75% of total revenues in the first quarter.

Mastek has six subsidiaries and 18 offices with operations

across the globe. These are in the US, UK, Germany, and two in Asia with focus

on the South East Asian market. The company has three offshore development

centers in at SEEPZ, Mumbai, Mhape in New Mumbai, and Pune. Mastek's total

staff strength currently stands at 2,536

employees, compared to 1,945 a year ago, and 2,410 a quarter ago, respectively,

signifying slow but steady headcount growth, with the expansion of its Mhape

facilities in Mumbai.

Going ahead, Mastek expects to reach revenues of Rs 132 crore

for the second quarter with profits of Rs 13 crore, showing around 8% sequential

growth. We expect Mastek to close the year ending June 2005 with revenues of Rs

500 crore and net profits of Rs 36 crores. Mastek's operating margins are

expected to remain stable for the next few quarters, as the company will see

higher spending after expansion and initial onsite operations as it signs up new

clients.

Mastek currently trades at Rs 329, discounting the estimated

June 2005 EPS 10.7 times and June 2006 EPS nine times. While decent earnings

growth is expected in 2005, we believe that the company may not be able to

maintain a similar growth in the subsequent year due to increasing staffing and

overheads costs. Thus, the earnings growth may not be that spectacular. Market

Underperfomer

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