Mastek Gets Target Price Upgrade From HDFC Securities On Multiple Growth Triggers; Maintains 'Add'

HDFC Securities Institutional Equities

Mastek Ltd. organic growth is set to recover to double digits, followed by an expansion in margins to the high teens. Mastek delivered a five-year average organic YoY constant currency revenue growth of ~10%, which slowed down to ~7% in FY24; we expect the organic growth to revive to low teens over FY24-27E. The growth will be triggered by-

1. revival in UK geography, which is ~60% of the revenue and is witnessing traction in both UK government and UK private segment;

2. increase in UK government’s digital spends in areas like defence and healthcare;

3. early signs of recovery in the NHS(the company expects to win net new deals);

4. incremental revenue from the defence deal which will add ~$50-60 million over the next three years;

5. revival in the US and growth will be led by more managed services deals, revival of client specific issues, and investments in areas like Oracle, Salesforce, and Data services; and

6. a strong 12-month order book of $262 million (+11% YoY).

The margin was impacted by ~150 bps over the last two years due to slowdown in organic revenue, US investments and Middle East restructuring. The Q3 margins will be affected by wage hike and seasonality. The margin recovery will start from Q4 with an expected ~135 bps margin expansion over the next two years; supported by the US revival and pyramid optimisation.

We expect the company to deliver +14/20% revenue/EPS CAGR over 24-27E. We have cut our EPS estimate for FY26/27E by ~3/2% but increase the multiple to 24 times versus 21x earlier based on growth revival in core geography and margin recovery.

Near-term uncertainty related to the appointment of the new CEO and CFO persists, but historically, a change in leadership has been positive for mid-tier IT companies.

We maintain our Add rating with a target price of Rs 4,000, based on 24x FY27E EPS. The stock is trading at 24/19x FY26/27E and generates a RoE of 16%.

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