Mastek is to declare its Q2FY07 results. According to CNBC-TV18 estimates, the company's net profit is expected to go up 5.47% from Rs 21.19 crore (Rs 211.9 million) to Rs 22.35 crore (Rs 223.5 million) quarter-on-quarter, QoQ.

Its revenues are seen going up 6.11% from Rs 195.93 crore (Rs 1.95 billion) to Rs 207.9 crore (Rs 2.07 billion) QoQ.

Q2FY07 Guidance

• Revenues: Rs 204-209 crore
• Net Profit: Rs 21.5-22.5 crore

Factors to watch

• Guidance; second half is usually better for the company
• Order book position
• Growth in Euorpe & US
• Increase in staff cost
• Traction in company’s insurance solution ‘Elixir’. Currently there are 15-20 Elixir based deals in the pipeline (the company expects 5-6 of these to materialize in 2Q FY07) of which Mastek is pursuing about 75% on its own.
• Last quarter Deloitte JV was a drag, check for the performance in december quarter.

Expectations

• Expect revenues to grow by over 6.11% to Rs 207.9 crore. Not much impact of rupee appreciation as mastek has greater Pound and Euro exposure over 60%.
• Expect Mastek to report an EBITDA growth of 13% on the back of about 120bps margin expansion as the wage hikes get absorbed this quarter. Also we expect positive order book additions and a tie-up with a large systems integrator in UK
• Net Profit expected to grow 5.47% to Rs 22.35 crore
• The company sees volatility QoQ because project based application development contributes about 70% of revenues while maintenance makes up for the rest. Government business is the mainstay of the company with about 43% of revenues (majority are fixed bid).
• The management reiterated that the margin guidance of 100-150 bps improvement in FY07 is very much on track.
• Mastek does business in this segment primarily through BT and Capita (relationship for about 10 years now). In the UK, Mastek has an arrangement with Capita that if it sells to a third party then the price will not be below a certain floor level. The NHS project contributing about 25 mn GBP per annum will last till FY08 unless renewed. The company hopes that it will be able to more than make up for the shortfall via new partnerships like Euriware.
• Insurance business - Gaining traction: The insurance segment contributes about 25% of overall revenues and has 18 customers. Elixir is the dominant contr ibutor in this segment with about 50% of revenues. The competitors that Mastek faces in this segment are from the likes of Accenture and CSC. Currently there are 15-20 Elixir based deals in the pipeline (the company expects 5-6 of these to materialize in 2Q FY07) of which Mastek is pursuing about 75% on its own. Strong growth is seen in this segment because of the business need to either integrate various disparate platforms or to migrate to a completely new platform.
• Expect bounce back in order book: In 1Q FY07 there was a dip in the order book by 6% QoQ for the first time in the last six quarters to Rs 3.59 bn. However, the management expects to bounce back with a USD 15-20 mn addition to its order book in this quarter (2Q FY07) on the back of a strong pipeline. The management would continue to focus on the top 100 players in the insurance space and large system integration deals in the government vertical.
• Two margin levers available: Mastek has significantly higher proportion of SG&A compared to its Indian peers. G&A at about 10% has little room for reduction but S&M at about 20% is high and the company expects a drop of 4-5% over the next 3-4 years. The management cited building of prototypes for each new project as the reason for high SG&A and expects scale benefits going forward. The company plans to add about 400-500 employees per annum.
• Historically, only 20% of new hires were freshers but going forward this would be increased to about 40%. We believe that the attrition rates would increase as a result of this, but st ill the costs per employee should work out cheaper.
• Revenue from top clients remain at uncomfortably high levels: The management continues its focus on few strat egic clients and is working towards deepening the relationship with each of them. Revenues from top five and top ten clients continue to remain at uncomfortably high levels of 73% and 88% respectively.

Q1 FY07

• Organic growth good, Margin growth and reasonable expansion in Bottomline seen, Overall organic growth in line with industry
• Organic margins up 150Bps, overall for the year Margins are on track, up by 100 bps
• Forex Gains 65 Lakhs, Heavily impacted by GBP-dollar movement
• Registered 30-35% growth in segments other than JV

Outlook

• Customers: - Looking at adding strategic customers, Not playing the Numbers Game
• Acquisitions: Strategy not to add companies to add to topline, Basic focus is organic growth, looking at synergistic acquisitions, esp govt insurance companies
• Pricing: Looking at fixed price contracts, to do solution pricing and value pricing in future
• Order Book: Q1 order  book lower then expected, Good pipeline, 5-6 orders to come through in Q2
• Order Book: Q2 order book to add 15-20Mn dollars, Orders from US, UK and Asia Pacific, Mainly In Insurance vertical
• Hiring: To end the year with 600-700 net additions, 50% of staff over 5 years old, despite which margins are high
• Hiring: Taken a salary hike this quarter, Revised entry level salaaries at 20%, ampact to be seen in Q2
• Capex:Total Capex for the year at Rs 40 Cr
• Forex: Forex to be significant factor going forward, Have 600 Mn dolloars hedged at 46.2/Dollar

DCOTG Business

• Consolidate revenue at 100%, profits at 50%, by the end of the year may be only 5-6% of profit pool
• Do not expect it to grow, to remain stable or decline over time, Guidance includes flat topline and bottomline from JV
• Has more focus on consulting than tech, tech declining

BPO

• Business not at the level of breaking even
• May breakeven by last quarter if Adequate customers are added

UK Operations

• Increased execution in insurance, trend to continue, Good Second quarter order book

US Operations

• In 2-3 years  US business to reach UK levels, US Sales and Marketing team increased, No impact on margins
• Though US contribution down QoQ, Growth rate of 40% to be maintained
• Possible slowdown at macro level in US