Value investor- India mid & small caps

Bhaskar Chakraborty

Equity Bottom-Up

<ul><li>New CEO with strong relationship in the UK government instrumental in driving 25%+ YoY growth in Mastek’s core government business. This, in turn, has driven 6% QoQ Constant Currency revenue growth for 4 consecutive quarters.</li><li>Taistech acquisition in the US enjoys 4-year revenue Cagr of 15%. Significant room to improve EBITDA margin from 6% currently to 12% over FY19-20 as investment phase gets over.</li><li>Core profitability improving with rationalization of travel, insurance and sub-contracting costs. Operating margin up 510bps YoY in 1HFY18. More room for expansion over FY19-20.</li><li>Significant business traction- 12-month order book up 104% YoY in Constant Currency terms; 12% net employee additions over 1HFY18.</li><li>We expect 40% YoY revenue growth in FY18 followed by 25% in FY19. We expect EBITDA margin expansion of 100bps YoY in FY19 as the investment phase in the newly acquired US business stabilizes. We expect 85% YoY PAT growth in FY18 followed by 30% in FY19.</li><li>Adjusted for the current market value of Mastek’s stake in US-listed Majesco, we note that the stock is trading at 8x our estimated FY19 EPS. We value Mastek’s core business at 12x FY19 EPS and add the market value of its stake in Majesco. Our target price is Rs530 (48% upside).</li></ul>

New CEO with strong relationship in the UK government instrumental in driving 25%+ YoY growth in Mastek’s core government business. This, in turn, has driven 6% QoQ Constant Currency revenue growth for 4 consecutive quarters.Taistech acquisition in the US enjoys 4-year revenue Cagr of 15%. Significant room to improve EBITDA margin from 6% currently to 12% over FY19-20 as investment phase gets over.Core profitability improving with rationalization of travel, insurance and sub-contracting costs. Operating margin up 510bps YoY in 1HFY18. More room for expansion over FY19-20.Significant business traction- 12-month order book up 104% YoY in Constant Currency terms; 12% net employee additions over 1HFY18.We expect 40% YoY revenue growth in FY18 followed by 25% in FY19. We expect EBITDA margin expansion of 100bps YoY in FY19 as the investment phase in the newly acquired US business stabilizes. We expect 85% YoY PAT growth in FY18 followed by 30% in FY19.Adjusted for the current market value of Mastek’s stake in US-listed Majesco, we note that the stock is trading at 8x our estimated FY19 EPS. We value Mastek’s core business at 12x FY19 EPS and add the market value of its stake in Majesco. Our target price is Rs530 (48% upside).

Mastek: Stellar Growth, Improving Profitability; BUY for 50% Upside

Mastek Ltd

Mastek: Stellar Growth, Improving Profitability; BUY for 50% Upside