Management Speak: Mastek - Building growth engines

Mastek (MAST) is a UK-centric IT services company with ~US$130m revenues in Q3FY18 (annualised) and focus on four key verticals – government (predominantly UK), retail, financial and Information Technology (IT) services. The company has seen improved performance, led by its newly appointed CEO, John Owens. Management expects MAST to generate premium revenue growth from: 1) its growth engine, Oracle commerce cloud services play in the US and UK (particularly government), 2) better mining and 3) aggressive acquisition strategy. Despite the run-up, the stock trades at a discount to peers (16x PE 3QFY18 annualised). Consistent execution could aid earnings upgrades and help the stock to re-rate.

Banking on organic and inorganic growth avenues: The management has built its strategy around superior account mining of existing clients, restructuring of sales organisation and inorganic acquisition for scale/market entry. In Dec 2016, MAST acquired TaisTech for a total consideration of ~US$25mn to scale up business in the US. Management is confident that the acquisition is accretive and is scouting for 2-3 more opportunities to the tune of US$25-US$30mn

Strong financial performance: MAST has grown consistently over last 10 quarters (4.6% CQGR) with EBITDA margin gradually improving from 1% in Q4FY16 to 12.3% in Q3FY18. The company has net cash of Rs1,665mn and its investment in the US-based Majesco is worth Rs1771mn (~15% of MAST mcap). Management expects to use the cash to accelerate inorganic growth and build scale/capabilities. The company has an improving ROE profile (11% in FY17) with cash conversion of 0.82x (CFO/EBITDA).

Valuations: There is a growing affinity among investors to reward IT mid-cap companies with better multiples that can execute consistently and deliver growth ahead of the industry. MAST has a steady leadership team and a growth engine that is emerging well. The stock price has run up over last 1 year and currently trades at 16x PE Q3FY18 (annualised) – still at a discount to peers. Superior execution could aid re-rating in the stock. We currently do not have a rating on the stock.