Buy This Multibagger Small Cap IT-Software Stock For 34% Potential Upside: Anand Rathi

Brokerage firm Anand Rathi has recently given a 'buy' call to Mastek Limited, a small cap IT-Software stock for a target price of Rs 2,710 apiece. The brokerage sees potential gains of 34% to the shares of the company. The company's market capitalisation is Rs 6,107 crore. The company recently acquires Metasoftech Solutions for $115m, US revenue to reach 26-27%.

Stock Outlook & Performance

The stock of Mastek closed today at Rs 2,031.45 apiece after falling 1.08%. It was opened at Rs 2,071 apiece on Nse, while the previous close was Rs 2,053.70 apiece. Its current market price i.e. Rs 2,031.45 is trading Rs 180.75 above its 52-week low level of Rs 1,80.70 recorded on 20th June 2022. The 52-week high level of the stock was recorded at Rs 3,669 apiece on 19th October 2021. 

 Stock's PE ratio is 20.68, while the P/B ratio is 4.44. Its face value is Rs 5. The TTM EPS is Rs 98.23. The dividend yield is 0.94. The ROE is 24.54%.

Mastek's share price in the last 1 week has moved up nearly 3.98%, and 2.83% in the last 1 month, respectively. In terms of returns on investment, the shares have performed well in long term, giving multibagger returns. However, in the last 1 year, it has given a negative return of 24.71%. Over the past 3 & 5 years, it has given multibagger returns of 344.53% and 523.54%, respectively. 

Stock Details
CMP	Rs 2,031.45
Target Price	Rs 2,710
Potential Upside	34.00%
Market Cap	Rs 6,107 cr
1-Year Return	-24.71%
3-Years Return	344.53%
5-Years Returns	523.54%

UK healthcare a drag, UK private picks up pace

Mastek's Q1 revenues were down 4.7% q/q, but y/y up 4.8%, to $74m. A large UK healthcare account ramped down and the company was faced with delays in deal wins and execution in some of the other accounts. UK private grew and is looking better. Overall, the UK was flattish in CC. US was slow, with the focus, to support growth, shifting to the newly acquired Salesforce capability (to be integrated from Q2).

Acquires Metasoftech, US revenue to reach 26-27%

Mastek acquired Metasoftech Solutions for $115m ($80m upfront; $35m earn-out), valuing it at 4.7x EV:sales (FY22) and ~3x FY24e EV:sales. Margins are likely to be similar to those of Mastek, given its India operations. It is the largest independent Salesforce consulting partner in the American Southwest (~320 employees) and operates in the Healthcare, Public Sector and Manufacturing verticals

EBITDA margins resilient, 18-20% outlook maintained

The Q1 FY23 margin was 19.2% (down 160 bps q/q, 268bps y/y) hurt by slow growth, cross-currency and all-time low 68.7% utilisation. Some of these factors are levers for margin defence. Wage hikes are planned for Q2 and attrition started cooling (25%, vs 28% in Q4).

 

Organic estimates lowered, Target Price Rs 2,710 (20x FY24e)

On cross-currency headwinds and the ramp-down in a key UK government healthcare account, Mastek's Q1 was weak. For the last three quarters, its US revenue was flattish, reflecting slower deal wins/execution. Management aims at acceleration in both regions by H2. The order backlog was a healthy $191m, up 21% y/y. In FY23, ~18-20% EBITDA margins would be maintained, primarily via better utilisation.

the brokerage said, "We lower our organic FY23e/ FY24e, but integrate the acquisition, resulting in a slight change to estimates. We retain a Buy on anticipated recovery in H2, driven by its order backlog & better execution. However, we lower our target to Rs2,710 (20x FY24e), a 20% cut, reflecting the weak organic performance and cross-currency headwinds."

The brokerage added, "We have lowered our FY23e/FY24e ~2%/5%, reflecting the weak revenue performance (down 5- 7%). This gets offset by the Metasoftech integration. The stock now trades at 15x FY24 P/E, which we find attractive."

Disclaimer

The stock has been picked from the brokerage report of Anand Rathi. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.