Buy Mastek; target of Rs 505: HDFC Securities

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HDFC Securities' research report on Mastek

Revenue was GBP 28.1mn (vs. est. GBP 28.5mn), in CC terms revenue was flat QoQ and de-grew 2.3% YoY. Softness was caused by the core geography UK (72% of rev, -0.6% QoQ in GBP terms) while US revenues stabilised (27% of rev, +1.4% QoQ CC). UK public sector was flat QoQ due to deferral of projects. Brexit uncertainty is impacting growth but strong order backlog (+4.4% QoQ) and completion of UK spending review can revive growth. UK private revenue declined 1.5% QoQ in GBP terms. UK private sector is facing client specific issues and recovery will be slow. US revenues grew 1.4% QoQ CC. Recent management changes and diversification of service offerings are strategic initiatives which are yielding results. BIT margin was 9.5% -196bps QoQ, margin was impacted by one-time employee separation expense (50bps impact) and wage hike. Mastek has managed to control costs in a challenging environment, employee expense is flat QoQ despite wage hike, attrition has increased to 24.1% (vs. 20.4% in 1Q), and large part of attrition is involuntary.

Outlook

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.

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