Shares of Mastek Ltd. experienced a significant surge of 15.10% in Friday's trade, hitting a high of Rs 1,856 on the BSE. This sharp rise follows a report from brokerage Anand Rathi, which retained its 'Buy' rating on the mid-cap IT stock and set a target price of Rs 2,377.
Anand Rathi characterized Mastek as a "possible turnaround story" in its recent report. This optimistic outlook is driven by several factors, including improving order visibility, emerging growth opportunities fueled by Artificial Intelligence (AI), and attractive valuations for the company's stock.
Q1 FY27 Performance and Regional Insights
Mastek delivered a steady performance in the first quarter of FY27, recording revenue of $104.8 million. This represented a 1.8% sequential increase but a 3% year-on-year decline in constant currency terms. The operating EBITDA margin stood at 15.4%, a sequential dip of 70 basis points but a 40 basis point improvement year-on-year.
The brokerage noted that margins were impacted by West Asia-related headwinds, specifically bench costs and unbilled provisioning. However, these were partially offset by foreign exchange gains and ongoing cost efficiencies.
A key positive highlight was the significant improvement in Mastek's order visibility. The company's 12-month order backlog reached approximately $310 million, marking a substantial 13.3% year-on-year increase. A notable win cited by Anand Rathi was a marquee $25 million, five-year Salesforce Agentforce deal in North America.
Market Segments and Growth Drivers
- United Kingdom: The UK remains Mastek's largest market, contributing around 67% of its total revenue. This segment grew approximately 2.2% sequentially, with an EBIT margin of 19.9%. Growth was supported by the Financial Conduct Authority (FCA) ramp-up and resilient demand from the Banking, Financial Services (BFS), and public sectors. However, the healthcare business faced challenges due to the NHS transition.
- North America: Accounting for about 22% of revenue, North America saw 2% sequential growth in constant currency terms. Anand Rathi anticipates this region will become a primary growth engine once Mastek scales its quarterly revenue run rate beyond $28-30 million, up from its current ~$23 million.
- West Asia: This region, contributing approximately 11% of revenue, experienced a 7.9% sequential decline in dollar terms, primarily due to ongoing geopolitical pressures.
AI Strategy and Valuation
AI is increasingly central to Mastek's growth strategy. The company has secured over 40 AI-led deal wins, and its Data & AI services business, which comprises 13.4% of revenue, grew 9.8% sequentially. Despite this growth, management anticipates renewal pricing pressure of around 15%, potentially rising to 20-25%, amidst intensifying competition in the AI services market.
Regarding valuations, Anand Rathi stated that Mastek trades at 11.6 times and 10.7 times estimated FY27 and FY28 earnings, respectively. The brokerage projects adjusted Earnings Per Share (EPS) to grow at an approximate 8% CAGR over FY26-28, reinforcing its Rs 2,377 target price.
Key risks identified for Mastek include potential weaker execution in the US market and a deterioration of the UK's fiscal environment, which could negatively impact NHS and broader public-sector spending. Despite these risks, Anand Rathi believes that scaled, execution-focused mid-cap IT companies like Mastek are well-positioned to benefit from increasing vendor consolidation and cost-take-out deals within the broader IT sector, even as overall IT-sector revenue growth is expected to remain muted in FY27 due to AI-led deflation and geopolitical pressures.