In the past one year, Mastek Ltd’s shares have underperformed the National Stock Exchange’s CNX IT index by as much as 66%. While the index of information technology stocks has risen by 21% in the past year, Mastek’s valuation has fallen by 58%.
This is because of a sharp deterioration in the firm’s financial performance. In the quarter ended September, Mastek ended up with losses owing to client ramp-downs and cost overruns. Before accounting for one-off items and exceptionals, the loss stood at Rs6.44 core at the operating level.
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The company’s reported results for the December quarter show a slight improvement. Revenue grew by 3% sequentially and losses at the operating level stood at Rs2.64 crore, again before accounting for one-off items and exceptionals.
The improvement, however, wasn’t enough to reassure investors. Mastek shares fell by 3.7% on Tuesday, on a day when the CNX IT index rose 2.5% on the back of strong results from Tata Consultancy Services Ltd.
Investors’ main concern seems to be that there is no sign yet of a pickup in demand for Mastek’s offerings.
The company’s outstanding orders that are expected to be executed in the next 12 months stood at Rs296 crore at the end of December, a drop of 5% compared with the order book of Rs312 core at the end of the September quarter.
Besides, the number of onsite employees has reduced to 700 at the end of the December quarter, from 768 in the preceding quarter and 794 at the end of the June quarter.
With the company losing out on order flow, utilization rates are falling, leading to a drop in profitability. It has reduced headcount, which should help in cost management in the coming quarters.
The key to returning to profitability is to grow revenue. Unless investors see signs of growth in volumes, Mastek shares should continue to languish.
Graphic by Naveen Kumar Saini/Mint
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