Mastek: Q1FY11 result analysis: Dismal performance again, SELL says ICICI Sec

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Waiting on the sidelines…
Mastek continues to face multiple operational headwinds. In Q1FY11,
US and European revenues declined by 2.6% and 9.4% QoQ and 18.2%
& 22.1% YoY, respectively. Development revenues declined 10% QoQ
and 9.7% YoY due to sluggish incremental revenues from large clients,
coupled with revenue reversals in the Asian geography. Staff costs
increased by 8.4 percentage points (pp) to 73.7% vs. 65.3% in Q4FY10
as the company effected 3.5% onsite and 20% offshore wage hikes.
From a services perspective, investments in Elixir versions are yet to
yield meaningful results while revenue growth from the government
vertical remains feeble. We believe visibility is at its trough and would
wait on the sidelines with our SELL rating till clarity emerges.
􀂃 Q1FY11 result analysis: Dismal performance again
Mastek reported Q1FY11 revenues of Rs 148.9 crore vs. our Rs
160.9 crore estimate and net loss of Rs 13.5 crore vs. our estimated
loss of Rs 8 crore. Revenues declined 8.8% QoQ and 21.4% YoY.
Gross margins came in at 17.1% vs. 30% in Q4FY10 as the company
gave 3.5% onsite and 20% offshore wage hikes in Q1FY11, resulting
in Rs 11 crore of incremental expenses. EBITDA margins declined
9.6 pp QoQ to -4.9% (ICICIdirect.com estimate: -2.8%) vs. 4.7% in
Q4FY10 as its clients cut down on IT spending.
􀂃 What next?
We expect Mastek to report Q2FY11 revenues of Rs 151 crore, flat
QoQ and an operating loss of Rs 3.3 crore on an EBITDA margin of -
2.2%. For the full year FY11, we expect Mastek’s revenues to
decline 13% to Rs 621 crore vs. Rs 714 crore in FY10. The company
could report a net loss of Rs 19 crore in FY11 vs. Rs 68 crore profit
in FY10.
Valuation
The company has been continuously underperforming in the last few
quarters. The order book executable over the next 12 months stands at a
modest Rs 312 crore. On the back of continuously deteriorating business
fundamentals for the company largely due to poor execution and weak
near term outlook, we rate the stock as SELL.