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Buy Mastek, target Rs 657: HDFC Securities

Buy Mastek at a price target of Rs 657.|
Apr 18, 2019, 03.18 PM IST
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The current market price of Mastek is Rs 463.
HDFC Securities has a buy call on Mastek with a target price of Rs 657.

The current market price of Mastek is Rs 463.

Time period given by the brokerage is one year when Mastek price can reach the defined target.

Investment rationale by the brokerage: Revenue was in-line at GBP 29.1mn (vs. est. GBP 29.1mn), +1.9/15.2 per cent QoQ/YoY CC. Growth was led by the core UK geography (77 per cent of rev, +4 per cent QoQ) within which govt sector growth was 13.6 per cent QoQ. We expect continued traction in this line of business (25 per cent CAGR), led by digital initiatives (DOS & G-Cloud framework) despite Brexit uncertainty.

UK pvt sector revenues declined 6.3 per cent QoQ decline as enterprises adopted a ‘wait and watch’ attitude wrt Brexit. We recognise near term pressure owing to Brexit uncertainties, but this is NOT a structural negative. Mastek’s Digital focus (84 per cent of revs) will help.

US revenues were soft (expected), revenues fell 3.6 per cent QoQ in USD terms. After three consecutive quarterly declines, FY20E should be stable, led by change in management team and the foray into new areas.

EBITDA margin at 13.2 per cent (vs. est 12.9 per cent) was led by higher utilisation. We are building in 12.9/13.1 per cent for FY20/21E. US revenues, which are currently at break-even level will support margins hereon.

Near term outlook: Strong seasonality offset by the Brexit deadlock will result in modest revenue growth. Divestment of stake in Majesco US will throw up cash which can be used for acquisitions.

Brexit uncertainty priced-in: With low exposure to legacy (nearly 16 per cent of rev), Mastek generates low teen margins, given higher on-site revenues and effort mix. We like its success in ramping up UK Govt digital business. Mastek is the only only Indian co in their top-10 vendor list. Co can generate 14.0/13.4 per cent GBP rev/EPS CAGR over FY19-21E (despite US softness and Brexit worries). Its stake in Majesco US (Rs 83/sh) and net cash (Rs 63/sh provide additional comfort. Risks to our thesis include deferment of spend due to Brexit and GBP depreciation.

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