Mastek says turnaround under way

Sudhakar Ram, chairman, managing director and chief executive officer of Mastek, the mid-cap information technology services and products company, believes it is set for the next phase of growth.

And, that some of the disappointing numbers over recent quarters are set to change.

During the quarter ended March 31, it added seven clients, the highest since the third quarter of 2007-08.

The problems began as the global economic recession impacted the IT industry.

Mastek provides solutions to insurance and government segments.

"We had a choice of cutting on some of our investments in product development and sales and marketing, but looking at some of the growth prospects, we decided not to. That is why we did not add much to the bottom line," said Ram.

The revenue and bottom line have been under pressure from the third quarter of 2008-09 (Mastek follows a July to June calendar). It had been reporting losses over the past three quarters.

For the March quarter, it had a net loss of Rs 7.1 crore (Rs 71 million), down from Rs 27.6 crore (Rs 276 million) in the quarter ended December 31, 2010.

Other than the meltdown, Mastek was also hit severely as two of its important clients started to ramp-down projects.

First was the BT/National Health Service contract from the UK that ended in 2008.

The impact was evident on the third quarter numbers, ended March 31, 2009.

Net profit was down 54.2 per cent over the year and revenue slipped 26 per cent.

Mastek also hit a hurdle when Capita, one of its important partners in the UK, decided to go slow in moving to a new platform from the company.

In March this year, Capita, one of the top five clients, said it was revisiting migrating of policies of other Capita clients on Mastek's Elixir4.

The impact will impact Mastek's revenue by 1.2-1.4 million pounds.

Apart from Capita, the company was also hit hard due to the budget cuts the UK government announced.

The UK contributes a little over half of Mastek's revenue and the government segment is a major focus.

"One thing we have done is to remove the Capita deal from the order book.

Though our relationship with the company continues.

"Net of that, our order book increased. But we think that when we start July, we will have a much healthier order backlog than last year," added Ram.

Reasons for hope

He feels that apart from the client-specific problems, the strategy put in place

last July is now coming into effect.

Mastek moved into a structure that was aligned with business focus by appointing a separate head for major divisions like government and insurance.

It also had a dedicated person for their existing accounts and the major services accounts. "All this has enhanced our team in both the UK and the US.

While we had thought this would yield a result by December 2010, it has taken an additional quarter," said Ram.

Some investments the company made in the products space had helped in getting new deals this quarter.

A fair amount of the seven deals signed have come from the insurance property and casualty segment.

"We were running dry of new deals in this segment, but that has changed," he added. Also, the acquisition of SEG Software has allowed the firm to increase its penetration in the US market.

Asked if the strategy on focusing on a few niche segments had backfired, Ram denies it.

"When you focus on a certain strategy, the risk and rewards are higher.

The nature of area that we have chosen, we think there is an inherent contra-cyclical tendency between life insurance P&C and government.

"All three are not going to go down at the same time.

"But during the slowdown, because it was not related to insurance but to the economy, both life and P&C came down.

"Add to this the budget cut announced by the government, he explained."

In the past three months, Mastek has given a negative return of 30.56 per cent, while the Bombay Stock Exchange IT index is down 3.3 per cent.

Going ahead, the company is banking on its partnership model and might also look at acquisition.

Both onsite and offshore utilisation improved to 94.4 per cent and 75.2 per cent, compared to 93.8 per cent and 72.8 per cent in the second quarter of 2010-11, respectively.

However, one concern area remains people.

It had 2,955 employees on March 31 and saw 163 people leaving it on a sequential basis.

"I do not think attrition is going to be a major concern for us. We have seen a substantial drop in resignations; this is also due to the work that we are getting. Besides, we will also announce a salary hike soon," said Ram.