Mastek - Revenue challenges ahead; Retain Underperform :: BofA Merrill Lynch,

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Mastek
   
Revenue challenges ahead;
Retain Underperform
„Revenue/ margin challenges remain; retain U/P
While Mastek has underperformed the broader markets by 30% over the past six
months, we see limited triggers ahead and retain our Underperform rating given 1)
likely muted revenue growth ahead vs. peers on high exposure to discretionary
spends (60%) and 2) earnings trajectory is likely to remain weak over the next 2-3
quarters leading to second consecutive year of losses. Post disappointing FY11, we
now forecast net losses for FY12 vs. profits earlier and estimate FY13E to decline to
Rs3/share vs. Rs23/share earlier. Cut PO to Rs90 at 3x EV/EBITDA FY13E at lower
end of its range of 3-8x, and at a discount to target multiples for mid-tier peers.
Revenue growth likely to remain weak vs. peers
We believe Mastek’s revenue profile is vulnerable than peers given the high
exposure to project-based revenues (~60% contribution to revs) which are
discretionary in nature. Given the current macro headwinds where discretionary
spends are likely to be pushed out, we believe revenue growth is likely to lag than
that of peers. Also revenue visibility weak as reflected by current order book of
Rs3bn, flattish yoy. We forecast 12% revenue CAGR (FY11-13E) vs. about 20-
30% for peers.
FY12 : Second consecutive year of losses likely
With employee cost at 73% of revenues vs. 55-60% for peers and salary hike due
in 1Q, we expect EBITDA margins to weaken further in 1Q leading to full-year
losses in FY12 as well.
Product revenues revival/ new order win to watch out for
We will watch out for new order wins in its product business and revival in order
book before changing our view on the stock.