Mastek: Headed for a full year loss; Underperform says BoA ML

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Mastek: Headed for a full year loss; Underperform
􀂄 Disappointing Q1; forecast net loss in FY11
Mastek 1Q results was disappointing with company reporting net loss of Rs171mn
driven by sharp 9% QoQ decline in revenues and wage hike lead margin decline.
With significant exposure to project based revenues (~65%), limited revenue
visibility, along with high cost structure, margin recovery is now likely to be
prolonged. Consequently we now expect losses in FY11 and cut FY12 EPS by
46%. We value the company at 6x EV/EBITDA FY12E at lower end of mid cap
band and cut PO to Rs190. Retain Underperform.
Reports first quarterly losses since inception
Mastek 1Q revenues was 11% lower than expected driven by lower development
revenues from Capita where Mastek is implementing its Insurance product,
revenue reversal in India/ Asia geography and project ramp down from US clients.
It reported EBITDA losses of Rs109mn driven by decline in revenues, wage hike
and cost overruns in a few projects in Asia. With limited revenue visibility, we
believe margins recovery is likely to be prolonged now.
New bookings critical for re rating
Order backlog grew a mere 2% QoQ in the quarter and remains one of the key
concerns for the stock. High exposure to discretionary project business, Europe
(51%) and frequent changes in senior management has impacted Mastek's
revenue visibility. While management intends to take corrective measures to stall
margin decline, we see limited triggers ahead. Retain Underperfom rating on the
stock.