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Robust revenue growth…

Mastek’s dollar revenues increased 7.5% QoQ (in CC terms) and by 9.7% QoQ (in reported terms) to US$65.9 million. The increase in revenues was led by Evosys acquisition and strong growth in UK government business. EBIT margin declined 100 bps QoQ to 19.8% mainly due to wage hike and investment in leadership & sales. Mastek’s 12-month order book rose 19.3% QoQ to US$154.6 million. Mastek has declared a dividend of | 9/share.

Healthy order book, integrated deals to drive growth

During the quarter, the company won one of the largest deals with US$25 million in the UK government segment spread over three years and extendable by another two years. In addition, the company is also witnessing healthy growth in new logo acquisition (which has long term growth potential) and increasing deal sizes (in the range of £35-100 million dollars by partnering with tier-1 and by participating in larger deals on standalone basis). Mastek is also building its sales & marketing to drive growth. Further, the company’s focus on client mining, providing integrated deal with Evosys and cross sell & up sell will further drive growth in revenues.

Apart from healthy growth in UK government, revival in UK private sector, bottoming of US and Evosys aspiration to double its revenues (from current ~20-25%) in US prompt us to be positive on Mastek’s long term revenue trajectory. This, coupled with healthy order book, inorganic growth (led by healthy cash balance), market share gains and hiring of US based CEO to drive US growth are other long term drivers for revenues. Hence, expect dollar revenues to grow at 14.7% CAGR in FY21-23E.

Despite headwinds margins to remain healthy

Mastek has many levers to improve margins like higher offshoring and cost rationalisation. However, considering the company’s aim to invest in leadership, sales, talent, shift in onsite offshore mix and resurgence of travel & facility cost the company expects EBITDA margins in the range of 20-21% as sustainable. Hence, we expect EBITDA margins of 21.2% in FY21 to taper to 20.9% & 20.5% for FY22E & FY23E, respectively.

Valuation & Outlook

The company is seeing healthy improvement in order book, increase in deal size and traction in multi-year deals. In addition, healthy growth in UK government, focus on improving US geography, client mining, traction in digital technologies, inorganic expansion and market share gains are expected to drive the company’s long term growth. Hence, we upgrade the stock from HOLD to BUY with a revised target price of | 1900 (18x FY23E EPS) (earlier TP | 1310).

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