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Deal wins to drive momentum

About the stock: Mastek Ltd (Mastek) offers data, apps, cloud services to public & private enterprise in the UK, US, Middle East, Asia Pacific and India

* The company’s recent acquisition of Evosys has enabled Mastek to provide end-to-end solutions and improves margins from ~14% to 21%

* Net debt free and healthy double digit return ratio (with RoCE of 20%)

Q3FY22 Results: Mastek reported muted Q3FY22 results.

* Dollar revenues increased 2.2% QoQ to US$73.6 million, while CC growth was of 3.7% QoQ

* UK business grew by 2.3% QoQ while US grew 5.1% QoQ

* Deal wins improved 10% QoQ to US$171 million

What should investors do? Mastek’s share price has grown by ~17x over the past five years (from ~| 171 in January 2017 to ~| 2,870 levels in January 2022).

* We now assign BUY rating to the stock (from HOLD earlier)

Target Price and Valuation: We value Mastek at | 3,360 i.e. 26x P/E on FY24E EPS

Key triggers for future price performance:

* Growth in new logo acquisition, increasing deal size, expansion of sales & marketing and market share gains to drive revenues

* Evosys’ aspiration to double its revenues (from current ~20-25%) in the US, healthy order book, inorganic growth (led by healthy cash balance) and hiring of US based CEO to drive US growth are other long term drivers for revenues

* Expect dollar revenues to grow at 18% CAGR in FY21-24E

Alternate Stock Idea: Apart from Mastek, in our IT coverage we also like LTI.

* Industry leading growth and healthy margins prompt us to be positive on the stock

* BUY with a target price of | 8,050

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