Value creation gets real…. Mastek :: ICICI Securities, report link

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Mastek Ltd.Acquired Agile Technologies Ltd.:: IndiaNivesh

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Mastek Ltd.|Q2FY15 Result Update | Above Expectation Performance: Strong growth in Insurance Vertical: Maintain BUY with TP of Rs.550 ::IndiaNivesh

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ICICI Sec- IT PICK: Mastek, Target Rs 500 (PDF link)

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Windfall gains at last!
Mastek has announced the restructuring of its insurance business into a
separate entity to better leverage existing IP capabilities and capital
allocation strategies. The sub-optimal performance of the company was
driven by disproportionate capital allocation (product development
expenses of | 57 crore in FY14 vs. PAT of | 52 crore) to insurance
practice (55% of revenues). Further, these investments were generally
penalised given the large gestation period and led to Mastek being valued
at a significant discount to pure-play IT services despite intrinsic value in
the products business. The restructuring, we believe, has the potential to
create substantial shareholder value while investor exposure could mirror
individual risk-reward appetite. Our comparable analysis suggests | 350-
400/share value for the insurance piece while | 110-150/share could be
attributed to the services business.
What could the fair value be?
Mastek’s current market capitalisation of ~| 700 crore is reflective of two
businesses. IT services and solutions, which generates revenue of | 416
and 14.4% EBITDA margins (FY14), and products business (generates
| 507 crore of revenues and 5.9% margins). On a combined basis, the
business is valued at a meagre trailing price/sales multiple of 0.8x.
However, were we to value the businesses separately, the insurance
business could be valued at | 750-900 crore, 1.5-1.8x Mcap/trailing sales
metric – 60% discount to global peer group average and 20% discount, at
the higher band, to the lowest multiple considering mediocre margin and
RoCE profile and domestic listing – while services business could be
valued at ~| 250-300 crore, 4-5x EV/trailing EBITDA metric – 16-33%
discount to global peer group average. Together, the analysis yields a fair
value of | 450-550/share, an average upside of 60% relative to current
market price. Please refer exhibits 1, 2 for detailed comparable comps.
Transaction details…
Mastek, in its annual general meeting, announced the demerger of
insurance products and solutions business (55% of revenues, 5.9%
EBITDA margins and 17.3% on adjusted basis, i.e. excluding product
development expenses) into a separate entity (to be renamed Majesco
Ltd). The company also plans to transfer the offshore insurance
operations from Majesco Ltd to its step down subsidiary, to be called
Majesco Software and Solutions India Pvt Ltd - “MSS India”, and held
through Majesco Mastek Insurance Software Solutions Inc. Existing
shareholders of Mastek would receive Majesco shares in the 1:1 ratio.
The shareholding post demerger would mirror the current shareholding.
The proposed structure involves two divisions, Majesco (insurance) and
Mastek (IT solutions business). Majesco will hold 83.5% stake in Majesco
Mastek (MM) US while the balance 16.5% will be held through Majesco
UK. A detailed pictorial representation is given in exhibit 3.
Change in valuation methodology leads to target price revision
We are transferring Mastek to our Nano Nivesh universe to comply with
our market capitalisation mandate. Though we adjust our estimates for
lower other income and await regulatory approvals, we are changing our
valuation methodology from P/E to sum-of-the-parts. We believe the
insurance business could be valued at 1.5-1.8x trailing pro-forma sales
metric while the services business could be valued at 4-5x trailing proforma
EV/EBITDA. This translates to a fair value of | 450 - 500 vs. our
earlier target price of | 220. However, investors are cautioned that the fair
value thesis is obligated to execution and earnings delivery.



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Hold Mastek Limited; Target : Rs 90 ::ICICI Securities

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E n  c o u r a g i n  g   q u  a r t e r …
Mastek reported its Q2FY12 revenue and earnings, which were above our
estimates. Constant currency revenues grew 2.6% while rupee rupees
grew 11.3% to | 172.9 crore vs. | 155.3 crore in Q1. Staff costs as a
percentage of revenues were 66.1% vs. 74.3% in Q1, an improvement of
8.2% percentage points (pps) sequentially led by continued costs
rationalisation. A stable operational performance helped Mastek return to
EBITDA positive, a first after five quarters. At | 2.97 crore, EBITDA
adjusted for forex gains of | 0.45 crore was also higher relative to our | 5
crore loss estimate. Reported quarterly loss of | 1.5 crore was higher than
our | 6.1 crore loss estimate, however, adjusted PAT could have been |
9.5 crore excluding the | 11.5 crore product cost & forex gains.
ƒ Q2FY12 earnings summary: revenue/EPS beat
Mastek reported Q2FY12 revenues of | 172.9 crore ahead of our
| 167.3 crore estimate and net loss of | 1.5 crore vs. our | 6.1 crore
loss estimate. Revenues grew 11.3% QoQ while EBITDA margins
came in at 2% vs. our -3.0% estimate.
ƒ Operating metric highlights
Mastek added four new clients in Q2FY12 taking the active client
base to 93 vs. 91 in Q1FY12. Onsite utilisation was flat QoQ at 93.1%
while offshore utilisation improved 5.9 pps to 89.3% vs. 83.4% in
Q1FY12. Government and insurance vertical revenues grew 7.4%
and 12.3% QoQ, respectively, whereas other financial services and
IT & other services grew 13.4% and 14.9% QoQ, respectively.
Development revenues grew 15.6% QoQ whereas maintenance
grew by 3.9% QoQ in Q2FY12.
V a l u a t i o n
Mastek reported a good set of numbers this quarter. The operational
performance improved this quarter with offshore utilisation increasing
590 bps to 89.3% from 83.4% in Q1. Excluding product costs, the
company could have reported PAT of | 9.5 crore. That said, we maintain
our  HOLD rating and | 90 price target, as an upgrade necessitates
sustainable revenue growth and operational performance

Hold Mastek; Target : Rs 90 ::ICICI Securities,

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P a t i e n c e   w e a r i n g   t h i n …
Mastek reported Q1FY12 revenues which were above our estimates.
Revenue growth of 3.6% in US$ and 7.7% in rupee terms was pleasing.
However, EBIT margins at -18.6% were below our -9.9% estimate led by
wage hikes (11% offshore and 3.5% onsite) and transition cost for the UK
project while vector goodwill write-off (| 6.5 crore) and forex losses of |
7.3 crore ensured that reported loss of | 27.3 crore was way below our |
9.8 crore loss estimate. Though the quantum of revenue growth was a
positive surprise, we believe operational prudence – through better cost
management - should have been the priority this quarter given overall
weakness in the company.
ƒ Q1FY12 earnings summary: revenue beat/EPS way below
Mastek reported Q1FY12 revenues of | 155.3 crore ahead of our |
143.8 crore estimate and net loss of | 27.3 crore vs. our | 9.8 crore
loss estimate. Revenues grew 7.7% QoQ. EBITDA margins came in
at -14.1% vs. our -5.0% estimate and -2.1% in Q4FY11. The margins
were affected mostly due to wage hikes of 11% offshore and 3.5%
onsite and effect of transition costs of 1.5%.
ƒ Operating metric highlights
Mastek added four new insurance clients in Q1FY12 taking the
active client base to 91 vs. 89 in Q4FY11. Onsite utilisation declined
0.3 pp to 93.4% vs. 93.7% in Q4FY11. Offshore utilisation improved
1 pp to 83.4% vs. 82.4% in Q4FY11. Government and insurance
vertical revenues increased by 34% QoQ and 5.3% QoQ,
respectively, whereas other financial services declined by 0.4%
QoQ. Development revenue grew by 15.1% QoQ whereas
maintenance declined by 4% QoQ in Q1FY12.
V a l u a t i o n
Though revenue growth of 7.7% in rupee terms was positive this quarter,
the operational performance was bleak. We believe cost should have
been managed better and the operational performance should have been
the priority. We maintain our HOLD rating but reduce our price target to |
90 and value the stock at 0.5x its | 171 book value vs. 0.6x | 184 earlier.

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.

Query Corner: Long-term correction seen in SAIL :: Business Line

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I want your opinion on Patni Computer purchased at Rs 563 and SAIL bought at an average rate of Rs 160.

Ravindra Davda

Patni Computer Systems (Rs 367.5): Patni Computer has long-term resistance around Rs 575 where it peaked in June 2007. The stock once again spluttered around this zone in June last year and is in a sharp correction since then. The stock declined below its key medium-term support at Rs 423 this month. Subsequent supports are at Rs 360 and Rs 300.

The stock is close to the first support but is not showing any sign of reversal from here.

Investors with long-term perspective can however hold the stock as long as it trades above Rs 300.

But the medium-term is likely to be choppy for this stock and it can face resistance at Rs 420 and Rs 500 in the days ahead. Investors with short-to-medium term perspective should exit the stock on failure to move beyond these resistances.

The area between Rs 600 and Rs 620 will continue to act as a strong long-term resistance over the next couple of years.

Hold Mastek Ltd; Search for stable quarter continues… Target : Rs110:: ICICI Securities,

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Search for stable quarter continues…
Mastek reported Q3FY11 revenues of | 150.4 crore, ahead of our | 141.4
estimate. However, it reported a loss of | 7.1 crore, higher compared to
our estimate of | 5.9 crore loss. Gross margins improved by another 576
bps to 27.5% vs. 21.7% in Q2, taking the total improvement to 1044 bps
in two quarters. However, the quest for a stable quarter remains as loss
of capita revenues, rising taxes & salary hikes could impact the
operational performance. Hence, we are maintaining our HOLD rating.

Mastek Ltd -BUY Target Price (Rs.) 210; Upside 25% :: Greshma

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Mastek Ltd -BUY


Target Price (Rs.) 210; Upside 25%



Investment Rationale:
Q2 FY11 Result Highlights: During the quarter Q2 FY11 Operating Income for the company stood at Rs. 149.8cr up by 0.6% sequentially and declined by 21.5% Y-o-Y basis, this decline is primarily due to decline in the revenue from Government vertical which was heavily impacted after the BT channel stopped outsourcing incremental work to the company, also there were delay in orders due to elections in UK. Company has incurred the losses of Rs. 27.6cr in Q2 FY11 as compared to profit of Rs. 23.5cr in Q2 FY10, this loss is mainly due to Impairment of goodwill amounting to Rs. 20.7cr and higher depreciation of Rs. 2.4cr. During the quarter company have added 2 new clients and the current order book stood at Rs. 296cr.
Inflow of fresh orders: Management has indicated that they are expecting the traction in order book. Mastek have done the partnership with one of the UK based company which will help the company to initiate projects from UK government. Also there was delay in getting orders from UK due to elections and also lot of orders was on hold, right now the things are stabilize and we believe company will get more orders by Q3 of this fiscal from UK as company has a very strong presence in UK.
Outlook
In Q1 FY11 management has indicated that the company is working on a margin improvement and serving better to the existing clients which will help the company to come back to the healthy growth profitability. Considering the opportunity in insurance vertical in which Mastek has an ample of experience we advise our investors to buy the stock at CMP of Rs. 167.7 for the target price of Rs. 210. At CMP the stock is trading at price earning ratio of 15.3x at its FY11E EPS of Rs. 11 which is 15-20 percent discount to its peers. As on Q2 FY11 company has a cash and cash equivalent of Rs. 152cr, which is approximately Rs. 56 per share which is ~33.3% of the CMP


Trend in Order Book (Rs. in cr) :
Order book has seen declining trend on q-o-q basis, however we are expecting new order inflow from UK government


Revenue by Industry (Rs. in cr):
Sharp decline seen in government vertical this is primarily due to BT channel stopped outsourcing incremental work to the company, we expect this vertical to improve going ahead


 The stock has seen a sharp decline since Dec’09 from the 460 levels and is currently trading around 167.
 There are a series of positive divergence observed and there is a possible pullback rally on cards to 190-195 levels.
 The Prices are currently below the long term100 & 200 Dma.
 The intermediate trend remains bearish and the decline is likely to halt around the 140-145 levels.


Company Profile
Mastek incorporated in 1982, is engaged in providing software solutions and integration services. Mastek a leading IT solutions player with global operations in providing new technology and IP-led enterprise solutions to insurance, government and financial service organizations worldwide
Today, Mastek has grown to become a US $227 million Corporation.
The company has employee strength of 3400 professionals. The company has partnered with various IT giants for delivering quality product and services namely Microsoft, Oracle and IBM are amongst others


Key Investment considerations
Opportunity in Insurance vertical
Revival of UK Economy
Inflow of Orders
Strategic Partnership with UK based company to gain traction in government vertical

Mastek -Restructuring underway , ICICI Securities

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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.

BofA Merrill Lynch:: Mastek- Muted order intake levels; Retain Underperform

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Mastek 
   
Muted order intake levels; 
Retain Underperform 

„Underperformance to continue
Mastek reported disappointing 2Q results, with a net loss of Rs106mn vs. our
estimate of a loss of Rs95mn. Fresh order intake declined 13% QoQ, post a 19%
QoQ decline reported in the previous quarter, and remains a key concern for the
stock. Given exposure to project-based revenues (~65%), muted order intake
during the quarter and a high cost structure, we believe that margin recovery is
likely to be prolonged. We retain our estimates and PO of Rs190, and retain our
Underperform rating on the stock.

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.

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.