Mastek shares rally 13% on strong Q4 numbers. Should you buy, sell or hold?

Shares of Mastek Ltd rallied more than 13 per cent in Thursday's trade after the company's fourth-quarter earnings beat analysts' estimates. The company's March quarter consolidated revenue surged 7 per cent on a sequential basis to ₹709.2 crore. The Q4 numbers were driven by organic growth, a strong order book, and margin expansion.

The stock was trading 13.46 per cent higher at ₹1,800.85 per share at around 11:30 am. Mastek shares have gained 11.04 per cent in the last five days and 10.16 per cent in the last one month.

Mastek reported strong constant currency revenue growth of 5.3 per cent q-o-q, beating estimates of 1.8 per cent cc revenue growth led by strong in-quarter execution and demand for Digital Engineering, Experience, and Cloud Transformation services.

The company's board has also recommended a final dividend of 240 per cent or ₹12 per equity share for fiscal ended 31 March, 2023. The dividend will be paid within 30 days from the date of the Annual General Meeting, the company said in a filing.

What should traders do?

The stock is trading at 14.6/11.7 times FY24/25E, said domestic brokerage house HDFC Securities, recommending a 'Add' call with a target price of ₹1,930 based on 15 times Dec-24E EPS.

Sharekhan believes the outlook for FY24 looks uncertain in the near term given the incrementally deteriorating macro environment.

Hence, despite a decent quarter and strong order backlog, the brokerage maintains a 'Hold' rating on Mastek with a revised target price of ₹1,740 as sustaining the momentum amidst uncertainty would be challenging.

As many as four analysts have maintained a 'buy' call on the stock, according to Bloomberg data. The average 12-month consensus price target implies an upside potential of 28.4 per cent.

UK propels growth

Mastek reported a strong quarter with a rebound in organic growth (+5.3 per cent QoQ CC), strong order book, and margin expansion. The organic growth of over 5 per cent was higher than HDFC Securities' estimate and was led by a revival in the UK government, strong UK private (retail and financial services) and stability in the NHS and Oracle CX business.

The UK geography (60 per cent of revenue) will continue to drive growth, supported by a revival in tech spend across UK central departments, new deal wins from the Home Office, revival in NHS (likely in H2FY24E) and investments in UK private sector.

The company has implemented leadership changes in the US to revive growth; Vijay Iyer (ex-persistent) will head the US geography and will focus on account mining and cross-sell, vertical expansion, large deals pipeline and accelerating growth in the healthcare vertical.

The order book remains healthy, having improved by 4.1 per cent QoQ CC to $218mn, indicating continuity of organic growth.

The EBITDA margin expanded in the quarter and will be in the range of 18-19 per cent in the medium term, supported by operating levers like utilisation improvement and reduction in sub-con.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.