Stock Review: MASTEK

THE stock of mid-tier IT company Mastek fell by over 3% on Thursday after the company reported a net loss in the September 2010 quarter. What may further disappoint investors is the fact that a turnaround in its operations may not be visible at least in the next two quarters. The Mumbai-headquartered 714-crore Mastek is among the mid-tier companies that are yet to reap the benefits of a recovery in IT demand in the US markets. The company provides solutions to insurance companies and government agencies, mainly in the US and Europe. Given the niche nature of its operations, Mastek has not been able to take advantage of a revival in demand from verticals, including banking and finance, manufacturing, infrastructure, and utilities.

Mastek has been struggling to sustain its revenue and profits over the past few quarters. In the last seven quarters, its topline has shrunk from 231 crore to 149 crore (September 2010 quarter). On the contrary, total expenses have escalated from 143 crore to 156 crore. Its finance director and CFO Farid Kazani attributes the increase in expenses to rising salaries and investment in product development.

   Rising expenses in the backdrop of falling sales have impacted its bottomline significantly. From a net profit level of over 33 crore a year-and-a-half ago, its operations have resulted in a net loss of 13.5 crore in the September 2010 quarter.

   The management has pointed at lower revenue from one of its significant clients, and revenue reduction in another client account. Further, its number of active clients has decreased from 88 a year ago to 83. What has caused concern is the fact that Mastek's expenditure on product development has not augmented its topline, thus putting pressure on its profitability.

   The management has hinted that it would take a few more quarters before normalcy returns to its operations. This is because the company is facing deceleration in government projects in the UK and steep competition in the US, which is relatively a new market for its insurance vertical. What can offer some solace to investors is a stable order book worth 312 crore executable over a period of 12 months. The company has also improved the number of days to collect its outstanding revenue from 55 days in the past to 50 days.

   At CMP, Mastek's stock traded at a P/E of 12.3. This is on the higher side of valuations compared with other tier-II IT players. Its stock price is likely to see more weakness given a bleak chance of a quick turnaround.