UK Data And AI Expansion Will Unlock New Opportunities

Key Takeaways

• Expanding data and AI capabilities in the U.K. positions Mastek for future growth and diverse business opportunities.
  
• Focus on operational efficiency and industry diversification is set to bolster revenue growth and improve margins.
  
• Declines in UK margins and U.S. deal momentum, coupled with low backlog growth, threaten future earnings and stability amidst macroeconomic challenges and strategic shifts.

Catalysts

Engages in the provision of enterprise technology solutions in India, the United Kingdom, Europe, North America, Middle East region, South-east Asia, India, Singapore, Australia, and internationally.

• The expansion of Mastek's data and AI capabilities, especially in the U.K. market, positions the company for significant future growth as these areas continue to see strong demand. This could positively impact revenue by opening new avenues for business and enhancing service offerings.
  
• Mastek's focus on operational efficiency, including workforce restructuring and AI adoption, is expected to improve cost structure and margins in the mid-term. This strategic shift may lead to stronger net margins as internal efficiencies are realized.
  
• The company's recent deal renewals with secured government services in the U.K. provide a robust revenue base and create opportunities for bidding on new projects. This stable backlog offers potential for consistent revenue growth over the next two years.
  
• The expansion into vertical markets such as healthcare, manufacturing, and utilities in the U.S., driven by Oracle and AI-related solutions, could diversify Mastek’s revenue streams and enhance their client base, supporting sustained revenue growth.
  
• Mastek's development of AI-led solutions and platforms, such as the adoption of AI for legacy modernization and efficiency improvements in projects, is likely to enhance its value proposition. This can drive future revenue growth and improve earnings, particularly as AI initiatives lead to long-term customer engagements.

Mastek Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mastek's revenue will grow by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.9% today to 11.7% in 3 years time.
• Analysts expect earnings to reach ₹5.7 billion (and earnings per share of ₹182.4) by about April 2028, up from ₹3.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.5x on those 2028 earnings, up from 18.2x today. This future PE is lower than the current PE for the IN IT industry at 27.5x.
• Analysts expect the number of shares outstanding to grow by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.45%, as per the Simply Wall St company report.

Mastek Future Earnings Per Share Growth

Risks

• The margins in the UK business have seen a significant drop due to newer business sectors like data and AI that currently yield lower margins, impacting overall profitability and operational efficiency.
  
• Macroeconomic uncertainty in the U.S. has led to budget cuts, insourcing by clients, and delays in deal momentum, which could negatively affect revenue growth and net profit.
  
• The company is experiencing a reset in North America, with structural changes and new strategy implementation that may lead to short-term financial pain and affect earnings.
  
• The 12-month order backlog has shown minimal growth (1.7%), creating concerns about sustained revenue pipelines and potential revenue stability.
  
• Lower margins on renewed contracts with the UK government could hinder future earnings growth and deteriorate net margins, pending the company's success in boosting efficiencies.

Valuation

• The analysts have a consensus price target of ₹2918.5 for Mastek based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3320.0, and the most bearish reporting a price target of just ₹2497.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹48.7 billion, earnings will come to ₹5.7 billion, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 15.5%.
  
• Given the current share price of ₹2216.1, the analyst price target of ₹2918.5 is 24.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.