Mastek Limited

Mastek Limited reported operating revenue of INR 905.7 crores in Q3 FY26, marking a 3.7% sequential decline in INR terms and a 4.8% constant currency reduction. This performance was impacted by seasonal headwinds, higher furloughs in the U.K., and the right-shifting of several transformation programs to Q4. Despite these challenges, the company achieved a robust bottom-line, with EBITDA margin expanding by 60 basis points to 16.1%, driven by AI-led operational efficiency (43 bps) and forex tailwinds (17 bps). Net profit improved to 11.7%, a 149 basis points increase quarter-on-quarter.

The company demonstrated strong order book growth, with its 12-month order backlog increasing by 18.4% year-over-year to $296 million and 5.7% quarter-on-quarter. The total order backlog grew by more than 30% year-over-year. Mastek secured a new large account in the Financial Services sector with a circa $20 million deal this quarter and added 17 new customers overall. Management highlighted an intentional strategic shift towards negotiating longer contract tenures (3-5 years) for AI-led initiatives, moving away from traditional 1-year renewals, which is contributing to faster Total Contract Value (TCV) growth.

Mastek continues its significant investment in AI capabilities, which has effectively eliminated the technology differentiator gap with larger market players, enabling competition for bigger core digital engineering and AI-led deals. The company reported delivering 15% to 80% improvements in AI-led engineering capability for its clients. While Mastek does not intend to monetize proprietary AI IP, its strategy focuses on leveraging AI-driven differentiation to win larger volumes and deliver efficiency, alongside a shift from time-and-material to outcome-based contracts offering clients 15-30% productivity savings over three years.

Healthcare and Life Sciences (HLS) remains a core focus, experiencing strong demand globally and in the U.K., with Mastek's consolidated capabilities in this sector proving highly differentiated. The Financial Services sector has shown renewed strength, becoming the third key vertical after HLS and Public Sector, marked by a circa $20 million new deal. In the U.S. market, core fundamental changes to capabilities and leadership are complete, with improving pipeline and order book, and sustainable growth expected next year. The U.K. Public Sector faces continued government pressure for efficiency (15%+) and budget shifts towards Healthcare, leading to some margin pressures.

Operational efficiency and AI-led productivity gains were critical in maintaining bottom-line performance despite revenue softness. The company's headcount reduced to 4,676 from 4,745 last quarter, reflecting a strategic focus on productivity improvement. The utilization rate dropped to 76.7% (including trainees) from 81.8% in the previous quarter, primarily due to higher leaves, festivals, and client furloughs. The company's DSO increased slightly to 84 days from 80 days, mainly due to administrative delays in U.K. collections during the holiday season, but is expected to improve in the next quarter.

Labor code changes resulted in an impact of INR 6.4 crores on EBITDA in Q3 FY26. This impact was partially offset by one-time^📎 benefits from leave accumulation reversal at onsite. Management noted that clarifications are still awaited from the labor department, making it difficult to assess the exact impact on Q4 profitability. However, the company has taken conservative assumptions and included all wage components in the new definition to mitigate significant incremental hits in Q4, with the ongoing impact estimated at $150,000 to $200,000 per quarter, subject to final clarifications.

Mastek maintains a strong balance sheet with a healthy cash position, with net cash increasing significantly to INR 346 crores from INR 135 crores last quarter, supported by almost INR 210 crores of operating cash generated in Q3. The company declared an interim dividend of INR 8 per share, representing a 160% payout. Management emphasized that the ROI on AI investments is highly tilted towards a positive return, balancing initial investments with long-term growth and shareholder value.