Investors should avoid Mastek now as it is facing troubled times

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Mastek - a company in the IT industry

IT industry is not in the best of the times now
IT industry is not in the best of the times now | Source

Mastek slips into loss

Plunges into a net loss

The shares of Mastek are traded at Rs.95 now. The share price has dropped in the last three months from a high of around Rs.128 to the present level. The company has not produced good results in Q1 compared to Q4. Revenue has increased from Rs.90.84 crore to Rs.101.81 crore. But net profit of Rs.22.53 crore in Q4 has become a net loss of Rs.3.87 crore now. Operating profit margin has dropped from a high of 31.18% to 3.75% whereas net profit margin has turned negative. The company’s shares were trading at Rs.286 in September 2010.

New orders not forthcoming

New deals hold the key for the company’s 2012 show. Due to salary hikes, the company’s margins have suffered. Mastek is a mid-sized IT company with its headquarters at Mumbai. The company slipped into net loss because of sluggish demand from its existing clients and lower addition of new clients. The company’s insipid performance is expected to continue well into the Q4 of the current year. The company has not received any sizeable order from the wealth management and insurance segments, which are its core business sectors. Mastek’s revenue fell from nearly Rs.1000 crore three years back to Rs.614 crore in the financial year 2011. In the two quarters ended June 2011, the company added ten new clients. It also bagged two multi million dollar deals recently in UK. In Q1, Mastek reported a 11% jump in its order book at Rs.309 crore compared to Q4.

Investment in products development will help

Mastek invested Rs.40 crore in each of the last two years in products development. This will help Mastek to acquire new clients in future. It may help to turnaround the company in the future. The company’s Q3 will be affected due to salary hikes. It may keep status quo in Q4 of the current year. From Q1 of the financial year 2012-13, the company should be posting good results if it is successful in adding new clients and win more orders from its existing clients. Therefore investors should patiently wait for the company to announce its Q1 results of next year. This will take around one year. In the financial year 2010-11 the company wrote off non-cash goodwill amounting to Rs.27.2 crore pertaining to one of its earlier acquisitions. This is a one-time charge and it will not figure in the company’s future profits again.

British subsidiary

The company’s wholly owned subsidiary in Britain Mastek UK Ltd has signed a multi-year framework agreement for IT services in Britain with an initial minimum commitment of GBP 8 million, which is expected to materially improve its revenues in the forthcoming years. The deal will involve Mastek absorbing the transitioning cost of approximately GBP 0.4 million during the next quarter.

Economic look uncertain in Europe and USA

The reporting of net loss for the second quarter by Mastek has raised questions about survival of mid-tier IT companies in an increasingly competitive environment. USA and European countries are experiencing recessionary trend in their economies. Besides, European countries are affected by the debt crisis. Many of the European countries like Greece, Spain, Portugal and Ireland are affected by the debt crisis. Italy is standing in the queue as the next member to get affected. Italy’s debt burden is much more than the combined debt burden of Greece, Spain, Portugal and Ireland. Under the circumstances, the IT companies are the first casualties as they depend on their overseas clients to give orders. But overseas clients are postponing their decision due to economic and business uncertainties. Nobody knows when these uncertainties will clear as it seems to be a chain reaction with one after the other countries getting affected. Therefore investors are advised to avoid the shares of Mastek now. The quality website has also recommended investors not to buy the shares of Mastek now.

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