Mastek Expects sequential dip in revenues in June’09 quarter

Mastek held its conference call after it announced its third quarter of FY2009. Sudhakar Ram, Managing Director, alongwith others addressed the call.

Highlights of the call

• For the third quarter ended March 2009, Mastek reported 8% sequential dip in operating revenues at Rs 231.11 crore. OPM dipped 210bps at 17.8% on the back of lower volumes and depreciation of GBP. Other Income decreased 63% at Rs 1.91 crore, interest cost decreased 14% at Rs 1.11 crore and depreciation charge was down 13% at Rs 6.71 crore. For the quarter forex gain was Rs 2.03 crore against forex loss of Rs 11.73 crore in the sequential quarter and tax provision was up 41% at Rs 3.78 crore with effective tax rate up 220bps at 10.1%. The resultant net profit was up 6% at Rs 33.53 crore. The reported net profit was up 7% at Rs 33.38 crore.

• In constant currency terms, the revenue was down at Rs 241.8 crore.

• Other Income for the quarter was down on account of lower expenses re-charged to customers. The amount in the sequential quarter was Rs 3 crore against Rs 20 lakh in the quarter under review.

• The US operations revenues grew 3% q-o-q at Rs 87.81 crore. The PBIT margins for US operations improved 400bps at 22.2%.

• UK operations contributed 54.7% (59.5% in sequential quarter) dipped 15% at Rs 126.45 crore due to depreciation of GBP and slowdown in volumes with PBIT margin of 34.2% down from 38.7% in sequential quarter. The Company saw slowdown in ramp up. NHS contracts saw ramp down. Also, a new program, which the company had expected to start did not start. This program would probably start in FY10.

• The Company has hedges of GBP 5 million and US$ 7 million (GBP 5.8 million and US$ 9.1 in sequential quarter). The company generally covers one month’s known receivables.

• In the industry verticals, Insurance grew 4.7% contributing 30.5%, Government sequentially dipped 13.2% contributing 36.5%, Other Financial Services dipped 8.4% contributing 16.3% and IT & others dipped 15.1% contributing 16.7% of the operating revenues.

• The NHS ramp down is going on and would go on thru June 2010.

• In the service offerings, Development dipped 5.2% sequentially at Rs 154.41 crore, Maintenance dipped 12.4% at Rs 73.98 crore and BPO decreased 25.7% at Rs 2.71 crore.

• The company added 2 (4 in sequential quarter) new clients with one is an end-to-end solution deal for the company’s STG Suite for P&C (property & casualty) insurers. The total active clients decreased to 88 from 89 clients in the sequential quarter. The top 5 clients contribute 58% (62% in sequential quarter) of the revenues & Top 10 clients contribute 73% (76% in sequential quarter). The number of million dollar clients has decreased to 33 from 37 in the sequential quarter.

• The order book as of March 31, 2009, which will be executed over the next 12-month period, is Rs 387 crore as against Rs 453 crore in the sequential quarter. The dip in order book can be equally due to GBP depreciation, the current macro environment and one new program not starting. Order book would be about 35-40% of sales.

• The company reduced about 220 employees (net) with the headcount at 4023 employees (4243 in sequential quarter). The number of employees offshore decreased to 3005 from 3113 in the sequential quarter and that of onsite decreased to 1017 from 1130 in the sequential quarter. Included in the total headcount is the virtual bench of 350 employees.

• Fixed Price contracts contributed 51.8% up from 51.3% in the sequential quarter, Time & Material contributed 47% up from 46.8% in sequential quarter and BPO contributed 1.2%.

• Excluding JV and BPO, utilization – onsite improved 26bps at 92.65% and offshore utilization dipped 806bps at 66.82%. However, excluding the virtual bench, the utilization is up at 76%.

• The cash & cash equivalents stand at Rs 151.84 crore (Rs 91.32 crore in sequential quarter), investments in mutual funds of Rs 59.03 crore (Rs 68.33 crore in sequential quarter) and debtors at Rs 229.96 crore (Rs 285.71 crore in sequential quarter). Yield on mutual funds is 6.8% and on deposits is 2.5%.

• The debt in the books is Rs 74.95 crore (Rs 84.36 crore in the sequential quarter) at Libor + 2.25% taken for STG acquisition.

• The Company would utilize the cash for acquisitions. It is looking at acquisitions in UK & US.

• Capex year to date is Rs 27 crore. Normal capex for the company is Rs 5-6 crore per quarter.

• About 60% of the expenses of the Company are in foreign currency.

Future Expectations

• The Company is not seeing any pressure on pricing in Solutions business, which accounts for more than 70% of revenues. However, in the services business, the Company is seeing pricing pressure and couple of large customers have been given 5-10% pricing cut w.e.f. April 2009.

• The effective tax rate would be about 12-14%. It is down currently on account of costs of STG acquisition.

• OPM going forward would be maintained and could improve slightly.

• For the April – June 2009 quarter, Mastek expects the Group Total Income to be in the range of Rs 220-230 crore implying a q-o-q de-growth of 5.6-1.3% and Net Profit after Tax and Minority interest to be in the range of Rs 30-32 crore implying a q-o-q growth of 10.5-4.6%. For the guidance, the GBP/Rupee rate is taken at Rs 71.5/GBP and USD/Rs rate of Rs 50.24/US$ same as in the sequential quarter. For FY09, the total income would be up 6-7.1% at Rs 970.87-980.87 crore and net profit up 2-3.5% at Rs 131.47-133.47 crore excluding prior period taxes.