The Hindu Business Line : Mastek: Buy

Investors can consider taking exposures in small lots in the Mastek stock with a medium-term perspective. At the current market price, the stock is trading at a price earnings multiple of 11 times its likely per share earnings for 2006-07. We have a `buy' recommendation outstanding at Rs 360 made in mid-September 2006 and this is a reiteration of that call.

Investors can use any price weakness linked to the broad market to step up exposures. Considering that the stock has been locked in a narrow band for a few months, the returns from the stock will be sedate vis-à-vis other mid-sized software stocks of a similar genre. Investors may need to keep their return expectations to 12-15 per cent.

The two key levers that are working well for Mastek are the contribution from the European geography and steady build-up of revenues and clientele from Elixir.

Elixir, its enterprise platform addressing the life insurance, annuity and pension segment, has added four clients in the second quarter ended December 31, 2006.

The European geography, which accounted for 67 per cent of its revenues, grew by 8.2 per cent in the latest quarter. The improvement in order book to Rs 405 crore - after two sluggish quarters - and operating profit margin improvement in the latest quarter are added kickers to the overall growth.

The relatively upbeat revenue and post-tax earnings guidance at 8.5 per cent and 10 per cent for the third quarter lend confidence to the underlying fundamentals.

The slow traction in the US geography and high exposure to discretionary development spending represent downside risks to the stock. Application development revenues accounted for over 70 per cent of its total revenues in the latest quarter. The high client concentration (88 per cent from the top ten clients) linked to development spending and long lead-time in client acquisition also remain key risks to the business.

Krishnan Thiagarajan

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