AI-first Strategies And UK Expansion Expected To Strengthen Future Prospects

Key Takeaways

• Mastek's expansion in UK government and healthcare, coupled with AI advancements, suggests future revenue growth and improved efficiency.
  
• Focus on high-value clients and strategic investments in AI are expected to enhance revenue per customer and net margins.
  
• High subcontractor costs, currency challenges, and reliance on large UK contracts may hinder margin expansion and future revenue growth.

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.

• Mastek’s strong order backlog of $250 million and a recent $40 million deal in secured government services indicate a healthy future revenue stream as they continue to expand their footprint in the UK, particularly in secured government services and health care. These expansions are expected to drive future revenue growth.
  
• The company’s AI-first approach, including initiatives like Adopt.ai for Oracle Cloud implementation and Lightbeam for AI-led data modernization, is expected to enhance operational efficiency and expand service offerings, likely supporting revenue growth and potentially improving net margins through increased efficiency.
  
• Mastek's strategy of focusing on fewer but larger and more profitable accounts, especially in AMEA, suggests an increase in revenue per customer, while focusing on high-value clients is likely to improve overall net margins by optimizing resource allocation.
  
• The positive outlook and momentum in Mastek’s UK business, driven by both secured government services and the revival in healthcare projects, suggest increasing revenue stability and growth opportunities as the UK government and private sector increase their digital investments.
  
• In North America, the consolidation of capabilities and the anticipated realization of full potential growth from H1 next year indicates expected steady revenue growth, with AI advancements further supporting this trajectory, potentially leading to improved earnings as strategic investments start yielding results.

Mastek Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mastek's revenue will grow by 14.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.6% today to 11.5% in 3 years time.
• Analysts expect earnings to reach ₹5.7 billion (and earnings per share of ₹180.24) by about February 2028, up from ₹3.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.7x on those 2028 earnings, up from 18.7x today. This future PE is lower than the current PE for the IN IT industry at 29.1x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.52%, as per the Simply Wall St company report.

Mastek Future Earnings Per Share Growth

Risks

• High employee costs and subcontractor expenses, as seen from increasing expenses despite a reduction in headcount, could affect net margins adversely.
  
• Challenges in maintaining or expanding margins in the UK and AMEA, particularly due to reliance on security-cleared subcontractors and currency headwinds, might impact overall profitability.
  
• Decreased order backlog growth compared to previous quarters indicates potential future revenue stagnation, especially if order wins do not improve.
  
• Dependence on large contracts within the UK government sector, which can come with margin pressure, poses a risk to sustainable profit margins.
  
• Headwinds in the US healthcare payer segment, despite relative strength in the provider space, could result in revenue fluctuations and growth instability.

Valuation

• The analysts have a consensus price target of ₹3554.0 for Mastek based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹49.6 billion, earnings will come to ₹5.7 billion, and it would be trading on a PE ratio of 28.7x, assuming you use a discount rate of 15.5%.
  
• Given the current share price of ₹2339.75, the analyst price target of ₹3554.0 is 34.2% 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.