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Deal wins boost confidence

Mastek reported a strong quarter with revenue and margin both coming in line. The order book improved 25.4% YoY, boosted by a USD 65mn+ win from the UK government (Home Office), following a USD 60mn NHS deal in Q3FY22. The management is aiming to reach USD 1bn revenue in the next five years, implying an organic revenue CAGR of >20%. Mastek expects to achieve this growth, based on (1) continued traction in the UK government business (~10% wallet share); (2) cloud migration/transformation agenda, which will drive Evosys growth; (3) recovery in UK private; and (4) turnaround in the US geography with focus on healthcare and life sciences vertical. The US geography will be a key focus area and investments will be made to strengthen the partner ecosystem. M&A will be a key pillar in US revival, with companies in the range of USD 30-40mn as targets. The target EBITDA margin range is 19- 20%; there could be near-term headwinds related to ongoing supply side concerns. We have cut our EPS estimate by 2-3% and our TP of INR 3,530 is based on 25x Mar-24E EPS. The stock is trading at a P/E 25/19.8x FY23/24E, which is a discount of ~34% to the mid-tier IT average. Maintain BUY.

Q4FY22 highlights: (1) Revenue at USD 77.2mn (+5.3/+18.3% QoQ/YoY CC) vs. estimate of USD 77mn. UK geography growth was strong (+8.4% QoQ), supported by the UK government (+5.4%) and UK private (+12.4%); (2) growth was broad-based, led by financial services (+12.8% QoQ), followed by manufacturing & technology (+7% QoQ), retail (+5.7% QoQ); however, healthcare remained flat sequentially; (3) EBIT margin declined 49bps QoQ at 18.7% (in line with our estimate of 18.9%), impacted by higher employee cost; (4) Evosys growth remained strong at +8.4% QoQ and +19.4% YoY for FY22; (5) Mastek hired 1,185 employees on a net basis in FY22 (vs. 388 in FY21), with attrition remaining flat QoQ at 28%; (6) the 12-month order backlog improved +13.3% QoQ to USD 194mn, which provides revenue visibility

Outlook: We expect USD revenue growth of +19.9/16.5% in FY23/24E, which implies a CQGR of 5.2/3.1% for FY23/24E. We estimate EBIT margin would come in at 18.0/18.6% in FY23/24E, resulting in an FY22-24E EPS CAGR of 21%. Quarterly

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