Good if they are already into or planning to get into all the clould providers. Otherwise size of opportunity would be much lesser to support higher growth. Considering that it has gone up a lot in recent times, a sub 5% growth with 30% attrition leaves very less on the table for the next set of upside and hence opportunity cost.
Btw, I am invested from lower level. But would I hold it for 15% compounder now onwards!!
Mastek Con call Notes (Q3-FY 22):
Very long call of around 100 min. Management was open and forthcoming.
Overall there were quite a few questions about attrition but I do not find any specific thing which Mastek is doing worth mentioning here.
General
US
Con Call Audio
Note: I have taken thses notes during the call and I might have misunderstood or misinterpreted the call. Please read/hear the call in case you need more clarity. I will update this post with links, once I get con call notes for future reference.
COMMENTS ON REVENUE GROWTH FROM MASTEK RESULTS CONFERENCE CALL
Comment #1
We had seen a dip in the NHS revenue in Q2 and that had effects in Q3 as well. But now we feel confident with the order book and the momentum, that we should be able to get that back on uptick starting this quarter, which is in Q4.
Comment #2
Madhu Babu, Analyst: Sir, based on this new NHS deal, so should we have a good 4Q because last two quarters have been soft. So it should be back to like 6%, 7% kind of quarter-on-quarter growth in 4Q?
Hiral Chandrana, Global Chief Executive Officer: Yeah, I mean, as you know, Madhu, we don’t guide right now, when it comes to quarter-on-quarter or revenue numbers. But we are confident about delivering numbers in that range. Given that order book has been strong across geographies, as well as some of the dips that we experienced in Q2 and Q3 are now behind us. So there is always risks in the business, but as it stands today, Q4 is definitely looking much better.
Comment #3
Baidik Sarkar, Analyst: Yeah. Hi, thanks again. I understand the ramp downs in UK, it might have been in the previous quarter and given the impact of the third wave as well. Given the NHS win today and the ramp of negatives that will come from the closure of other smaller projects, do you reckon we will get back into sequential growth starting Q4 itself?
Hiral Chandrana, Global Chief Executive Officer: Yes, Baidik, answer is yes.
COMMENTS ON WHY THERE IS QoQ DECREASE IN CLIENTS & WHY ORDER BACKLOG IS NOT HIGHER
Manoj Bahety, Analyst:
If I look at your disclosure in the press release, like if you have added around 25 new clients, but your active clients we saw this last quarter is down from 447 to 421. And secondly, despite of 60 million then large deals, your 12 months order backlog, it has gone up from $155 million to $171 million.
Hiral Chandrana, Global Chief Executive Officer:
The number of clients that we have is actually significantly higher, right. Now this has certain advantages and that’s a different part of the strategy that we’re going to execute on how we cater to those clients. But there is also our ability to move into the upper mid-market and Fortune 1000 customer that is paying-off. So we do believe that there is an advantage in focusing on lesser number of clients as a whole. And particularly in certain geographies like Middle East, where we believe there is opportunities in some of the existing customer. We don’t have to necessarily go after every single client or every single team. So you’re seeing that reflect in the new clients and the active client as well. Where if there is a project or a small engagement with the client , we have not put our effort into renewing anything there. Instead, we’re focusing on some of the larger deals and larger clients. So that’s the answer to the first part of your question. Arun you want to quickly comment on the order book and then I can add if you want.
Arun Agarwal, Group Chief Financial Officer:
If you’re looking to $60 million deal that is a four-year dollar deal. However, whole order book may not reflect in 12 months number because they’re long-tail to execute. I hope that helps, Manoj.
Manoj Bahety, Analyst:
Okay. So it is next 12 months order backlog, right?
Arun Agarwal, Group Chief Financial Officer:
Yes. Yes.
Manoj Bahety, Analyst:
Okay. So it won’t include entire $60 million, right?
Mastek biz model is slightly different than other similar size IT services, there are primarily three growth engines and each is going to behave differently from others, hence QoQ lumpiness which in near future out of mgmt control, while it presents short term hiccups and uncertainty in sequential performance, on positive side it also builds Optionalities and higher growth runway in med term
Three engines of growth
Question - why margins were low prior to Corona? Will current margins sustain?If you extend the team aspect - on-site ratio would be significantly higher in pre corona world and in past con calls mgmt did mention that post lock down etc Mastek India team did heavy lifting and seeing results clients are more open to better blended model( higher offshore ratio ), thus structural change IMO. Had plans to ask this Q but didn’t get past queue in call.
Engine 2 - Oracle - Evosys biz - This is what makes over all clinet no looks skewed, having close to 500 clients and making 2000 cr revenue ( FY21)…doesn’t make much sense at 4 cr/client runrate. Evosys is small implementation projects( guess would be typically few months type), benefiting from Oracle mkt share gains from SAP. Again this is unlikely a high profit margin when acquired, high volume leads to high overheads typically.
Mastek is smartly using this to extend relationships from implementation to managed services delivered by offshore teams thus margins improvement and longer contracts. One needs to let go of clients which are at tail end, loss making( read middle east), this middle east baggage impact in corona( negative margins) is reducing with time and should turn to positive profits soon.
Engine 3 - D2X, Data engg, Digital focused - this works in silo as well as clubbed with Engine 2 above, North America - now this is biggest opportunity size and highest competetion as well - Acquisition focus would be here as well. As we can see NA margins are low being in investment phase as well as lower prices to win deals. Evosys relationships driven wins are low hanging fruits( Hiral kept emphasizing on Integrated deals - mid size and decent margins), winning net new clients will not be easy( will come at cost of margins and ticket size will be small to get entry in door), Acquisition remains key trigger here - buyout will not be cheap valuations in current scenario ( not able to close good assets and commentary pushes 1-2 Qtr type) but hopefully provide margin triggers ( on-site heavy to on-off model).
Haven’t overplayed domain angle to avoid complexity. Rest of world is small but growing pie but not a needle moving one and modest margins.
To sum up , business has multiple moving parts with each having its own characteristics, going through internal re structures as well, valuations are fair relative to midcap IT and reasons are there, as it is not ONE smooth Engine clocking out a persistent/elxsi/Happiest mind type performance. High float makes the volatile as well in short term. Attrition isn’t impacting margins IMO is connected to their Engine 1( UK) skewed construct.
Summary - 20% growth is given ,re rating requires a high and consistent growth( yoy exists and QoQ should be back in Q4), Acquisition to fall in place soon, outside UK biz margins to stabilize ( US going up and Middle East drag to get over). News flow in deal wins to help.
Risks - Acquisition delay, Integrated deal momentum slow down, internal re-org impacts though low chances. UK geo political situation. Competition intensity and pricing detoriation.
Invested and adding in dips.
Is there any way to find the attrition rates geography wise ?
Initially I thought we could deduce this through Geographical Employee Addition Data and Margins % but data doesn’t seem to show any specific pattern. Nevertheless, posting the data since Q1 FY21 for Employee Addition / Churn , Attrition % and Margins % i to connect the dots if at all possible.
This chart shows you the QoQ growth momentum in small/medium IT services companies.
And here is the price performance after Q2 Results were announced by each company.
RSystems: +42.75%
eclerx: +14.6%
Persistent: +5.64
Zensar: -8.8%
Mphasis: -10.44%
Happiest: -9.57
Mastek: -20.55%
Market seems to have been quite consistent, perform or get punished!
If you are an investor in mass tech for the coming future you should look for two things.
Another point that I would like to highlight with respect to the IT Bina is that the little transformation need of any organisation cannot be solved by only one cloud offering. for example Amazon Web Services bring scale Google bring work and their other cloud offering which bring other services so does every organisation need multiple cloud provider.
could you elaborate about failed acquisitions please
Indigo Blue and Taistech are the failed acquisitions that everyone talks about. I am a newbie to this so can anyone please explain how do we know that these acquisitions failed? what metrics do we look at to judge Evosys as successful and Taistech and IndigoBlue as failures?
Ritwik was working with L&T Technology Services where he was Global Delivery Head for Platform, Products and Solutions Business. Ritwik comes with a rich experience of guiding digital transformation initiatives across industries having held senior positions in Wipro, Infosys, and the likes of the Service Industry. He was also the Founder & CTO of two start-ups in the B2B2C space with successful exits.
SIP karna koi Mr Ashank Desai se siikhe.
Saw a new notification where Mr Ashank Desai added 2000 more shares on the 9th!
Ashank Desai holds 33 lakhs Mastek’s share (+ some more which are on his family’s name). Mastek has announced Rs 7 as interim dividend. He does not have any siginicant interest other than Mastek (as compared to other promoters) so it seems he is investing the dividend back in Mastek.
Mastek’s 33 Lakhs shares will give 2.1 cr dividend (there will be tax, but assume this for simplicity) and at current price around 2500-2600 will buy around 8000 shares of Mastek, which is what he has bought so far.
Mastek seems to have a lot going for it, encouraged further by the promoter buying. My only concern is the attrition. I spoke to one of my friends working in the software industry, and he said that attrition is a big problem because even though you can hire new people, the quality and efficiency of the project suffers. This happens at the level where project managers and team leaders leave, because they usually have a plan which the team members follow. Thus, when a new team leader comes in, the original plan of action is usually scrapped. So the project work may suffer due to delays, ineffective coordination and inferior methods of execution.
Just my two cents, looking to learn from others. Would love to read experienced member’s thoughts on it.
Discloure: Not invested, watching.
Speaking from my experience in IT industry, I m working in a MNC where attrition is around 20+ , in order to cope up with this lot of freshers were introduced and laterals in the mid level , earlier freshers need to go through atleast 6-8 months of training and then will be inducted into a production projects ( again there will be project specific screening and interview) . But now it got completely changed and freshers are directly inducted into projects and then given training . Now mid levels employees ( 5-12 year experience ) has to put extra effort to tarin them and manage projects . If attrition is happening in these mid levels then it will have severe impact on the coming quarters ( again no company would give breakup in attrition) . Normally in junior level (1-3 years ) attrition will be high as they pursue for higher education or move to other companies . Mastek has got highest level of attrition in mid level IT and considering they got around 5000+ employees is worrying me as an invester . Pay package for laterals are around 60-100% higher than the existing one and companies has to give salary correction multiple times to existing employees make it some what even (my company has give 3 salary hike in last year ). Usually companies define a median salary range for all levels. Also some companies maintain a ratio of total salary /(number of years of exp* 100000) this should be in range of 1-2. Due to lateral hiring this ratio will see wide fluctuations. overall how margins will be impacted is yet to see .
