Fundamental Pick of the week

Mastek FY22 results – Retains its standing as a strong midcap IT services player

Mastek is mid cap IT services company which has outperformed most of the IT services in India over the past few years. It offers data, apps and cloud services to public & private enterprise in the UK, US, Middle East, Asia Pacific and India. Mastek recently released its FY22 results along with a roadmap for the next three years. Let’s find out what the numbers say, and can it continue its growth path from here onwards?

Key Highlights

• Revenues grew 26.8% YoY to Rs 2,184 crore in FY22

• PAT grew 32.4% YoY to Rs 333.4 crore in FY22

• Acquisition of Evosys has enabled margins to improve YOY to 21% from 14%.

• Company scores high on the ROCE metric with a ROCE of 33.6% in FY22

• The company is debt free

More than 2X revenue growth and 4X profit growth over last five years

Mastek’s revenues and net profits are consistently rising over the last five financial years. From FY18 till FY22, the revenues grew by 168% to Rs 2,184 crore and net profits grew by 321% to Rs 295.1 crore in FY22.

Mastek re-aligned leadership in the America region with a focus to increase its revenue contribution from this region. Umang Nahata, the erstwhile CEO of Evosys, the entity acquired by Mastek, is now in charge of the US business. Raman Sapra, who was earlier President for US region has been elevated to head the Global service line and M & A.

The company has strengthened its sales and marketing team in US as a result of which deal size in the region has been constantly rising. In the year 2020, the deal sizes were in the range of 500K-600K USD, which are now in the range of USD5mn to USD10million.

Mastek is aggressively looking at acquisitions into the areas of data automation, AI, cloud platform and customer experience enhancement. The company indicated it may be able to close a few deals in the next quarters. The company added 25 new clients in Q3FY2022 (vs 45 clients in Q2FY2022). The decline in client count is due to its conscious decision for exiting small-sized clients in Middle East region where the company is now focusing on limited but high value customers.

Apart from the consistent growth in revenues and net profits, the company has also improved its operating EBITDA margins over the last few years. From 12.2% EBITDA margins in FY18 to 21.2% in FY22. The PAT margins have also been rising and have nearly doubled from 8.3% in FY18 to 15% in FY22. The numbers demonstrate the company growth without sacrificing margins, rather it has expanded the margins also.

Mastek scores exceptionally well on other financial metrics as well. The ROE and ROCE for the company have grown steadily along with revenue growth and this is a validation of prudent financial management.

Over the past three years, while onshore staff is constant, offshore numbers have grown significantly. This gives confidence on the capability for further growth which include its ambitious plans to grow in the US and the UK, as appropriate number of staff are available to work on projects.

Another factor that has played out over the last three years is the reduced dependency on the top 5 and top 10 clients. While the revenues from top 10 clients stood at 58% in FY20, it is down to 43% in FY22. This also means that the company is now generating more than half of its revenues from the rest of its clients.

It is also looking to diversify its geographical concentration. Mastek is looking to scale up the US business so that US region would contribute 33.8% of the revenue mix in FY25 against 17.6% in FY22. As a result, contribution from the UK business, which currently forms 64.2% of the revenue mix would come down to 46.5% in FY22 and that of AMEA would come down from 14.4% in FY22 to 9.7% in FY25.

The roadmap for FY25

In its investor presentation for FY22, the company has stated objectives which it wants to achieve by FY25. These include generating an annual revenue of a $ 1billion and be amongst the top 3 in mid cap IT services companies.

The company has outlined strategic themes for its Vision 2025. Firstly, it plans to increase revenue contribution from the US region, which the management expects to be driven by larger deal sizes. Secondly it would focus on building capacity for data, analytics, cloud and automation. And thirdly, the company is targeting to replicate its strong healthcare and life-sciences capabilities in UK across the US and other markets.

With the change of leadership in the US, ambitious M&A plans, expanding its products suite, Mastek looks well poised to meet its targets for FY25.