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Business in core markets continues to face headwinds

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%)

Q3FY23 Results: Reported weak organic growth in Q3.

* Revenue grew 3.1% QoQ in CC terms with flat organic growth while in dollar terms revenue grew 2.6% QoQ

* EBITDA margin was flat sequentially at 17.3%

* Reported 12M order backlog of US$206.2 mn, up 10.2%QoQ

What should investors do? Mastek’s share price has grown by ~4.1x over the past five years (from ~| 414 in January 2018 to ~| 1,695 levels in January 2023).

* We change our rating on the stock from HOLD to REDUCE

Target Price and Valuation: We value Mastek at | 1,520 i.e. 13x P/E on FY25E 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

* Management change in the US region may help it to grow stronger & achieve desired revenue mix

* Acquisition of MST Solutions will help drive growth in the US region

* Expect revenues to grow at 8.2% CAGR in FY22-25E

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

* Key beneficiary of improved digital demand, industry leading revenue growth & healthy capital allocation prompt us to be positive

* BUY with a target price of | 1,730

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