Mastek Research: Edelweiss Rating: Accumulate CMP: Rs 267

Mastek Research: Edelweiss Rating: Accumulate CMP: Rs 267

MASTEK has been downgraded by Edelweiss from 'buy' to 'accumulate',
due to the absence of near-term triggers that signal an uptick in
growth rates. Mastek's Q4 FY07 revenues were slightly lower than
expected, though net profit was above expectation. Revenues, at Rs 180
crore, were down 6% and net profit, at Rs 23.7 crore, was flat QoQ on
a like-on-like basis.

However, higher other income of Rs 6.5 crore reduced this impact at
the net profit level. Mastek continues to suffer from several issues
that limit its expansion. Its sales and marketing engine is investment-
heavy, direct client relationships are few, slowdown in the government
sector drags down growth, and the new client acquisition pace is
lethargic. The company seems to be highly dependant on acquisitions to
meet its stated revenue growth guidance of 35% (in USD) for FY08.

Edelweiss believes the company may come up short of its guidance.
Also, its efforts to rationalise its high-cost sales and marketing
cost model are unlikely to bear fruit in the near term, due to its
investments in expanding solutions footprint in the US insurance
segment. At current market price, the stock trades at a P/E of 7.4x
and 6.5x its FY08E and FY09E earnings, respectively.