Mastek: Back on track but will the journey continue?

MUMBAI: Mumbai headquartered Mastek has seen a sharp run-up on bourses in the current calendar year so far. The stock has doubled since January 1 following a revival in business in each of the two quarters to June 2012 against the backdrop of net losses in the earlier quarters. The tier-2 IT player, which offers solutions to insurance and government sectors mainly in the US and Europe has been reporting a gradual traction in new business.

However, the debt crisis in some of the European economies and slower than expected recovery in the US have stoked worries about the future demand. This poses challenges for companies such as Mastek, which have been showing signs of revival.

To begin with, it can hamper the rebound in client additions. Mastek's active client base expanded by 11 in the June 2012 quarter from the year ago level. The addition was strong in the last six months with 13 new accounts under its belt. A prolonged economic slump would impact the upward trend in the new business.

But, the growth in revenue is likely to continue for a few more quarters irrespective of the economic scenario considering the company's higher order inflow in the past few quarters. Mastek had Rs 485 crore worth of orders as on June 30, 2012 to be executed over the 12 months. This is a much stronger order book position compared to that of Rs 309 a year ago. In addition, the latest order book is nearly two-third of the FY12 revenue of Rs 739 crore, which offers a better revenue visibility.

Another indicator of a firm business momentum is the addition in the employee base after a series of headcount reductions in prior few quarters. Mastek added 100 employees in the June quarter compared with the pervious quarter. On a year-on-year basis, it added 178 employees against a reduction 338 a year ago. The growing headcount hints at the prospects of sustained demand in the near term. Like most other tier-2 IT vendors, Mastek too is likely to continue with its growth streak in the coming quarters.

The stock ended the Wednesday's trading session at Rs 162 on BSE, 1.4% lower from the previous close. It trades at a trailing P/E of 8.7. Given the possibility of continued business momentum, the stock will continue to attract investors' attention.