Stock Review: Mastek

 

Mastek's scrip has lost one-fourth of its value since its FY11 financial results in the last week of July. The mid-sized IT company, headquartered in Mumbai, reported a net loss for the year on account of lower additions of new clients and sluggish demand from existing clients. While a turnaround in operations is not immediately in the offing, Mastek is expected to report a slower decline in its performance in the coming two quarters considering product development investments in the past which would help secure new business and the current momentum in its order booking from wealth management and insurance segments.

Mastek is among the mid-tier IT firms worst hit by the subprime crisis, which could never make a comeback even though overall outsourcing demand picked up in the past six quarters. Its revenue fell sharply to . 614 crore in FY11 from . 965 crore two years ago.

One reason of the depressed performance could be its niche focus on insurance vertical and government projects. During the crisis, both segments were impacted. However, the company is showing early signs of a revival. In the two quarters ended June 2011, it added 10 clients. It also bagged two multimillion dollar deals in the UK recently. Its reported 11% sequential jump in the order book size at . 309 crore in the June 2011 quarter.

Another factor that should help in a turnaround is Mastek's investment in product development in the past couple of years. It has invested nearly . 40 crore in each of the past two fiscals in its product portfolio. The improved capabilities are likely to help in new client acquisitions.

Investors may also expect the company to reduce its net loss over the next few quarters. One reason for this is the fact that of the . 55.9-crore loss reported for FY11, over . 27.2 crore was non-cash goodwill write-off pertaining to one of its earlier acquisitions. Being a onetime charge, it will not figure in the company's future profits.

In the September quarter, Mastek is expected to take a hit of up to 300 basis points in operating margin due to annual salary hikes. Its FY12 performance will depend upon how well the company manages to win new deals.