Partnering Mastek

POUND WISE

The mid-sized IT company offers moderate growth with stability, due to the assurance provided by its long-term contracts and partnerships.

Mastek, one of the few mid-sized domestic IT services firms that have successfully withstood competition from their bigger rivals through specialisation, provides investors with a low-risk, moderate-return investment option.

Though the stock's valuation is not likely to undergo any drastic improvement, the company's strategy of specialising in the financial and government sectors is likely to ensure healthy growth rates of around 20 in its revenues and earnings over the next year.

For example, during the last four quarters, the Rs 650-crore company has managed a more or less stable top line growth of around 20 per cent year on year, while it improved its bottom line by 25 per cent from Rs 50.6 crore in March 2005 to Rs 63.2 crore this year.

With the company's equity base having remained constant at Rs 7 crore divided into 1.4 crore shares of Rs 5 each for the past three years, the rising profits have resulted in earnings-per-share rising from a paltry Rs 13.75 a-year-and-a-half ago to Rs 22.50 now.

Yet, with the company's financials under pressure and its future looking uncertain in the face of increasing competition from IT services majors, the stock remained an under-performer till late last year when it finally broke the Rs 180-185 price-barrier.

Since then, with the company managing to improve its sales by around 5 per cent every quarter and its profits by around 6 per cent, the stock has made up for the past indifference on the part of investors.

During the last nine months, the stock has more than doubled in value to command the present price of Rs 380. Relative valuations too have gone up, from just under 10 times its past yearly earnings six quarters ago to close to 17 times now.

While the stock's valuations have already scaled up closer to the average for mid-sized IT services companies on the bourses, left-over margin improvements, coupled with healthy growth in its top line, are likely to see its share price deliver decent returns over the next one year. The company's chief attraction, however, lies in the more or less assured nature of its future revenues and profits.

According to the management, it currently has Rs 380 crore worth of orders waiting to be implemented over the next one year alone and has "considerably more" over the longer term, thanks to long-term contracts like the ten-year service contract it entered into with UK services major Capita and, more recently, 3-year, ¤35 million (around Rs 200 crore) contract with French IT services giant Euriware.

"The increase in earnings has been because of many reasons," says CFO Jamshed Jassawala.

"The most obvious one is that the company has grown bigger without having to raise much extra capital. An increase in size, especially since a lot of it has come from our existing clients, also gives us economy of scale. For example, this has happened since we have been able to get bigger and bigger chunks of business from our clients after starting off our relationships in a small way," he says.

Currently, Mastek has nearly 84 per cent of its revenues coming from just ten clients, including the biggest two "� Capita, the UK's biggest BPO company, and British Telecom "� with which it is implementing the world's largest ongoing IT project, for the department of health of the British government.

Besides application development, the deal involves a 10-year, £27 million maintenance contract for a UK-wide patients' database being put in place by a confederation under BT.

"The reason why we have been able to grow at the rate we have and improve our margins has been because of the nature of our relationships," says Sudhakar Ram, director and CEO of the group, which includes two joint venture companies including one in the US.

"In addition to selling directly to customers under our insurance solutions divison, we are trying to sell ourselves as the best company to partner with for mission-critical projects. After we carried out most of the software development work for Capital in the London congestion charging project, we have started exploiting our past references and experience to get even more such projects. In a way, you could say that our track record also made BT trust us in the patients' database project."

The company has a 3,000-strong workforce in India, which helps it form strategic, long-term partnerships with other IT companies without significant presence here.

In March, it announced an agreement with Euriware, the IT services arm of French energy major Areva, to set up an 450-500 strong offshore development centre for the latter in India. The shift has also reflected itself in the company's revenues, with nearly 43 per cent of it now coming from large, confederation-implemented mission-critical projects, mainly in Europe.

Another reason for the improving performance has been the company's decision to focus on just one vertical or industry in direct business.

Having started off two decades ago by supplying stock-broking software in India, it zoomed in on the insurance sector two years ago as its core area of focus. It still has nearly 51 per cent of its revenues coming from financial-sector companies in the insurance, asset management etc.

Mastek owns a suite of end-to-end products for insurance companies "� Elixir "� through which it competes with the much bigger, global companies like Accenture and CSC.

"We believe that due to the secretive and isolated nature of the industry, insurance solutions will always be development- and customisation-intensive. This, we believe, gives us an edge over others, though we still have to get our feet in the door by selling a small part of our package first," Jassawala says.

"For example, two out of the top three insurance companies in the US and eight out of the top 20 in the world are using at least one part of our Elixir suite," he points out.

The company intends to use its good will with its current bigger IT partners as well as its focus on the insurance vertical to drive growth over the coming years.

"We are past the phase where we would take up just any kind of coding work. We will now stick completely to the solutions approach, where we are either providing a part of the IP or where we think the experience can help us develop our own solutions in the future," says Ram.