Mastek Limited - Midsize IT company

Q1-FY 21 Con Call Notes.
Key takeaway from the con call

  • Mastek will get 200 cr from Majesco sales. It is the net amount after paying tax (or considering the structure of the deal tax may not be required)
  • Current performance can be sustained in Q2 and can be accelerated in H2
  • Q1 has been a real challenge.
  • A number of new contract signing extended into Q2.
  • US - Struggle goes on.
  • Plan to divest non-core asset and invest in incoming generating assets.
  • Aspiration- Become a recognised mid-cap. This seems to be a new focus for the management as they iterated this word a few times during the call. This indicates to me that Mastek will be a lot of things investors want to hear with a focus on improving profitability. For example, they can increase the profit by cost-cutting (already doing it) or keeping bench level very low. This may be good in the short term and boost immediate profitability, but when the project starts coming in, they will struggle to get the resource on board.
  • Price Pressure is an ongoing trend.
  • Revenue down Q-Q and increased risk of client bankruptcy.
  • Canada and the Middle east- the additional market for cross-sell.
  • Canada and European market new opportunity.
  • Focus on local hiring.
  • Planning to hire 100 + trainee this quarter. This shall impact profitability for next 2/3 quarters.
  • Capital allocation priorities- Conserving cash, repaying the debt, reinvestment in the business. They are not keen on increasing dividend or buyback at this moment and focusing on navigating COVID crisis. I think this is good (exactly what many investors want to hear)
  • Evosys Value by the Delivery approach to execution- It is an outcome-based approach to delivery. This is quite different than other company offers. Evosys Developed various IP assets to aid this.
  • Cross Sales- Pursing it in all geography.
  • The average size of Evosys deals is $200,000-300,000, which is small from Mastek’s point of view. But it offers Mastek immense cross-sell opportunities. The biggest cross-sales deals Mastek signed in Q1 is $4 to 5 million and 4- 5 deals are in the range of $1 million. I think next 4-5 quarters shall provide Mastek with quite a few cross-sales opportunities. Management has said that Evosys customer acquisition engine is a major decision-maker for acquiring them.
  • Addition of 40-50 cr of cash every quarter.

My view

Mastek has 170 cr of cash + (40-50 cr) of cash addition every quarter. By the end of March 2021 (optimistically assuming that COVID situation does not become worst than the current), Mastek will have approximately 300 cr of cash. In addition, receipt of 200 cr shall repay most of the existing debt. In a nutshell, Mastek will be more or less debt-free plus 250- 300 cr of cash by the end of March 2021 and generating PAT of around 180 cr.

At a current price of 1400 cr, Mastek is valued at PE of 7 @FY 21 earning. Based on the current valuation, it is attractive.
On a technical side (I am not an expert in this, but read few things from on valuepicker), the stock all-time high is 608, which is not too far from the current price. Once it breaks that price, there is a high probability of it reaching new highs.

Please refer to reasearchbytes for full voice transcript of the call. You may need to register to hear the full transcript.
Here is PDF of con call transcript .
Note- I am holding Mastek and views are biased.

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