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Mastek: Restructuring underway
Though Mastek reported in-line numbers, we believe re-structuring is
underway. Sequentially, the absolute headcount declined by 242 while
employee costs were trimmed leading to a 4.7 percentage points (pp)
improvement in gross margins. Other notables were travel &
conveyance expenses that declined 0.9 pp to 4% of Q2FY11 revenues
vs. 4.9% in Q1FY11. Operationally, a conscious effort seems to be
underway to manage cost. However, apprehensions still exist and a
meaningful change in Mastek’s outlook necessitates persistent cost
rationalisation and sustainable revenue and bookings growth.
Consequently, we have changed our rating to REDUCE from SELL
earlier, with | 160 target price.
ƒ Q2FY11 result analysis: in line numbers
Mastek reported Q2FY11 revenues of | 149.8 crore vs. our | 145.9
crore estimate and net loss of | 7 crore vs. our estimated loss of |
6.9 crore. Revenues grew 0.6% QoQ and declined 21.5% YoY.
Gross margins came in at 21.7% vs. 17.1% in Q1FY11 as company
rationalisation weighed in. EBITDA margins excluding forex gains
came in at -2.2% vs. our -2.9% estimate and -4.9% in Q1FY11.
ƒ Revenue & bookings growth imperative
We expect Mastek to report Q3FY11 revenues of | 150.2 crore, flat
QoQ and an operating loss of | 0.75 crore on an EBITDA margin of -
0.5%. For the full year FY11, we expect Mastek’s revenues to
decline 14% to | 616 crore vs. | 714 crore in FY10. The company
could report a net loss adjusted for exceptional items of | 25.6 crore
in FY11 vs. | 68 crore profit in FY10.
Valuation
Though the company continues to underperform since FY10, we believe
the likely trough was reached in Q2FY11. However, a meaningful change
in company outlook necessitates persistent cost rationalisation along with
sustainable revenue and bookings growth. Lack of this could create a
near-term overhang in the stock. Consequently, we rate Mastek as
REDUCE from SELL earlier.
Valuation
On the revenue front, the company is likely to report FY06 run rate. With
an inadequate near term outlook, we believe revenues will decline in
FY11. We expect revenues to dip 13% in FY11 and grow 10.2% in FY12.
The Q3FY11 margin could likely remain under pressure because of weak
revenue growth. Though the company continues to underperform since
FY10, we believe the likely trough was reached in Q2FY11. However, a
meaningful change in the company outlook necessitates persistent cost
rationalisation along with sustainable revenue and bookings growth.
Thus, we are maintaining our estimates and changing the rating to
REDUCE vs. SELL earlier. Our target price is 0.86x its current BVPS of |
185 i.e. | 160 with 9% downside from current levels.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Mastek: Restructuring underway
Though Mastek reported in-line numbers, we believe re-structuring is
underway. Sequentially, the absolute headcount declined by 242 while
employee costs were trimmed leading to a 4.7 percentage points (pp)
improvement in gross margins. Other notables were travel &
conveyance expenses that declined 0.9 pp to 4% of Q2FY11 revenues
vs. 4.9% in Q1FY11. Operationally, a conscious effort seems to be
underway to manage cost. However, apprehensions still exist and a
meaningful change in Mastek’s outlook necessitates persistent cost
rationalisation and sustainable revenue and bookings growth.
Consequently, we have changed our rating to REDUCE from SELL
earlier, with | 160 target price.
ƒ Q2FY11 result analysis: in line numbers
Mastek reported Q2FY11 revenues of | 149.8 crore vs. our | 145.9
crore estimate and net loss of | 7 crore vs. our estimated loss of |
6.9 crore. Revenues grew 0.6% QoQ and declined 21.5% YoY.
Gross margins came in at 21.7% vs. 17.1% in Q1FY11 as company
rationalisation weighed in. EBITDA margins excluding forex gains
came in at -2.2% vs. our -2.9% estimate and -4.9% in Q1FY11.
ƒ Revenue & bookings growth imperative
We expect Mastek to report Q3FY11 revenues of | 150.2 crore, flat
QoQ and an operating loss of | 0.75 crore on an EBITDA margin of -
0.5%. For the full year FY11, we expect Mastek’s revenues to
decline 14% to | 616 crore vs. | 714 crore in FY10. The company
could report a net loss adjusted for exceptional items of | 25.6 crore
in FY11 vs. | 68 crore profit in FY10.
Valuation
Though the company continues to underperform since FY10, we believe
the likely trough was reached in Q2FY11. However, a meaningful change
in company outlook necessitates persistent cost rationalisation along with
sustainable revenue and bookings growth. Lack of this could create a
near-term overhang in the stock. Consequently, we rate Mastek as
REDUCE from SELL earlier.
Valuation
On the revenue front, the company is likely to report FY06 run rate. With
an inadequate near term outlook, we believe revenues will decline in
FY11. We expect revenues to dip 13% in FY11 and grow 10.2% in FY12.
The Q3FY11 margin could likely remain under pressure because of weak
revenue growth. Though the company continues to underperform since
FY10, we believe the likely trough was reached in Q2FY11. However, a
meaningful change in the company outlook necessitates persistent cost
rationalisation along with sustainable revenue and bookings growth.
Thus, we are maintaining our estimates and changing the rating to
REDUCE vs. SELL earlier. Our target price is 0.86x its current BVPS of |
185 i.e. | 160 with 9% downside from current levels.
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