The company’s acquisition in the US has suffered on both the revenue and profitability front. Although the US operations have shown some signs of an improvement, it will still take time for a complete turnaround. In addition, the company’s aim to further grow through acquisition poses a risk to profitability and balance sheet. Further, elevated attrition levels (24.1% in Q2FY20) and high dependence on top clients are also near term challenges. At the CMP, the stock is trading at an attractive valuation of ~9x FY21E EPS. While valuations appear to be cheap optically, it is largely on account of weak near term growth outlook coupled with acquisition led strategy. Hence, we recommend REDUCE on the stock with a target price of Rs 345/share.
We maintain BUY on Mastek despite slight miss on revenue and margins. Brexit deal announcement is positive but we do not build any optimism in our estimates and will wait for clarity. We cut our EPS est. by ~5% for FY21E. SoTP based TP of Rs 505 implies 9x Sep- 21E EPS plus Rs 94/sh for 12% stake in Majesco US.
We maintain BUY on Mastek following a weak 1Q on revenues but stable margin performance. US turnaround is faster than expected and order book growth is encouraging. We cut est. by ~4% factoring soft UK Pvt. Our SoTP of Rs 618 implies 11x FY21E EPS plus Rs 94/sh for 12% stake in Majesco US.
Mastek’s Q4 revenue was $37.9m, up 1.7% q/q, 9.5% y/y (CC: 1.9%, 15.2%). The UK slowed (up only 3.6% q/q, 16% y/y) on delays in projects signed/one ramp-down impact. The US performance dragged (down 4.8% q/q, 10% y/y) but restructuring measures are likely to yield results in FY20. The EBITDA margin rose to 13.2%, up 40bps q/q. On the in-line results, we retain our estimates and Buy call, with a target of Rs 670 (12x FY21e). The Majesco stake contributes Rs 91 a share.
Mastek is blessed with lower exposure to Legacy (Digital is ~80% of rev) but generates low-teen margins (~13%) due to higher on-site rev mix (~72% vs mid-cap avg. of ~55%). Mastek is well placed to generate revenue/EPS CAGR of 15/16% over FY19-21E (despite US softness and Brexit uncertainty) and is available at attractive valuations of 8.3x FY21E vs mid-cap avg. of ~13x. Stake in Majesco US (~Rs 79/share), net cash position (Rs 82/share) provides additional comfort. We Initiate coverage with a BUY rating and a TP of Rs 660, based on 11x FY21E EPS.