1 Mid Cap & 1 Small Cap Stock To Buy For Good Returns In 12 Months

The stocks of Tata Communications and Mastek Ltd have been given a buy call rating by ICICI Direct. Mastek Ltd has a target price of Rs. 3360 set by the brokerage, while Tata Communications has a target price of Rs. 1775. The brokerage has set a 12-month target period for both stocks and expects them to reach their respective price targets from their current price levels. Mastek Ltd is a small-cap IT company with a market capitalization of Rs 8,460.60 crore. Tata Communications Ltd, on the other hand, is a mid-cap telecommunications company with a market capitalization of Rs 39,168.98 crore.

Mastek Ltd

ICICI Direct has said in a report that "Mastek's share price has grown by ~17x over the past five years (from ~Rs 171 in January 2017 to ~Rs 2,870 levels in January 2022). We now assign a BUY rating to the stock (from HOLD earlier). We value Mastek at Rs 3,360 i.e. 26x P/E on FY24E EPS."

Q3FY22 results according to the brokerage

• Mastek reported muted Q3FY22 results.
• Dollar revenues increased 2.2% QoQ to US$73.6 million, while constant currency (CC) growth was 3.7% QoQ.
• UK business grew by 2.3% QoQ while US grew by 5.1% QoQ.
• Deal wins improved 10% QoQ to US$171 million.

Key triggers for future price performance of Mastek as per ICICI Direct

• Growth in new logo acquisition, increasing deal size, expansion of sales & marketing and market share gains to drive revenues.
• Evosys' aspiration to double its revenues (from current ~20-25%) in the US, healthy order book, inorganic growth (led by healthy cash balance) and hiring of US-based CEO to drive US growth are other long term drivers for revenues.
• Expect dollar revenues to grow at 18% CAGR in FY21-24E.

Tata Communications (TCom)

According to the brokerage "TCom share price has grown at ~17% CAGR over the past five years. We maintain BUY on the company. We value TCom at a target price of Rs 1775."

Q3FY22 results according to ICICI Direct

• TCom reported a stable Q3FY22 performance.
• Topline at Rs 4185 crore, was down 0.9% YoY & up 0.3% QoQ, led by data revenues (forming ~77% of the revenues) up 3.4% YoY & 3% QoQ at Rs 3233 crore, due to picking up in business and improvement across all segments.
• Consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) was at Rs 1082 crore, up 3.5% YoY and down 2.7% QoQ. The consequent margin was at 25.9% (up 109 bps YoY, 20 bps QoQ on adjusted basis). Data EBITDA margin was at 32.2%, down 80 bps QoQ (up 40 bps on adjusted basis) and flattish YoY. Profit After Tax (PAT) was at Rs 395 crore, up 28% YoY. Net debt at Rs 7,189 crore, was down by Rs 572 crore QoQ and Rs 783 crore YoY, led by working capital mix and robust free cash flow (FCF) generation.

Key triggers for future price performance of TCom according to the brokerage

• Growth to be driven by platforms viz. a) cloud, edge, security b) next-generation connectivity c) NetFoundry d) MOVE & IoT, wherein each has robust market size growth potential of 15-25% compound annual growth rate (CAGR) in next four to five years.
• We expect ~7.3% revenue CAGR in FY21-24E in the overall data segment, driven by likely acceleration in growth from FY23 onwards. We expect overall margins to be at 25.9% in FY24 vs. 24.9% in FY21.
• Strong cash flows generation to aid deleveraging.

Disclaimer

The stocks have been picked from the brokerage report of ICICI Direct. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.