Stock Review: Mastek

 

Co's Fortunes Will Take Some Time To Turn Around

 

MASTEK'S scrip has substantially underperformed the broader market in the past six months. It has fallen 23% during the period against a 5% gain in the Bombay Stock Exchange's (BSE) benchmark Sensex. The depressed performance reflects Mastek's woes on the operational front in the past few quarters. And the stock's performance in the June quarter suggests that investors may have to wait for a few more quarters to see a turnaround.

   Mastek is a Mumbai-headquartered mid-tier IT company that provides solutions to insurance and government domains. It continued to report dismal performance in the quarter and the year ended June 10 on Wednesday.

   The company's sales during the June quarter fell by 20% to Rs 165 crore. During FY10, its revenue dropped by 23% to Rs 714 crore. Delays in project executions has weighed on its topline in the past two quarters.

   Its operations in the UK continue to remain under pressure, straining the company's financials. Further, its profitability suffered as operating expenses did not fall in tandem with the fall in sales. The company also incurred foreign exchange loss during the quarter. As a result, its operating margin contracted by as much as 10.6 percentage points to 4.7% from the year-ago.

   Human resource is another major concern for Mastek. It could recruit only 83 new employees during the June quarter against the target of 300. It shows that the company is struggling to recruit and retain talent, given the pick-up in demand for skilled workforce.

   There seems to be no respite for investors in the immediate future given the pressure on its margins and near stagnant order book position. Also, to retain talent, it has given salary hikes of 20% even though its business is not doing that well. The decision is likely to knock another 500 basis points from its operating margin in the September 10 quarter.

   At the current market price of Rs 295.5, the company's scrip is trading at nearly 12 times its earnings in the trailing 12 months. The company is witnessing higher demand from its insurance vertical in the US. It needs to be seen how fast Mastek can take advantage of the demand push to turn its business around.