Majesco Limited - looking Forward


(sanjayjalindhra) #1

Majesco Limited

About the Company:
Business:
Majesco (formerly MajescoMastek) is a provider of Insurance Technology Software, Information Technology Services and consulting to insurance carriers worldwide across lines of business – Property & Casualty (General Insurance), Life, Annuity, Health, Pensions, And Group & Worksite Benefits Insurance.

Timeline:
1992: Founded as MajescoMastek, a U.S. Subsidiary of Global technology solutions provider, Mastek.
2005: Acquired Entegram LLC, a Connecticut based software company.
2007: Acquired Vector Insurance Services, a technology solutions provider and third party administrator. (L&A)
2008: System Task Group (STG), an IP based enterprise solution provider, was acquired. (P&C)
2010: SEG Software, Canada based policy administration systems provider was acquired.
2015: Acquired Agile Technologies, a consulting firm.
2015: Demerger from Mastek.
2015: Listing on NYSE.
2015: Merger with Cover-All Technologies.

Overview:
Majesco, as an Insurance technology solutions provider, has thrived its way to be in top 3 companies in core systems, data, distribution, digital and cloud offerings, where in cloud based services it enjoys monopolistic position. With the successful integration of Agile and Cover All, the company has ended fiscal year 2016 achieving its goal of market penetration with strengthened brand, new clients and order book growth.

Opportunities:
* The Insurance Technology market is a large and growing market with over 11,000 insurers globally and with large number of US insurer still using dated platforms, the market is huge.

  • With around $25 billion of addressable market in new hardware and software, maintenance and support and external service and staffing, P&C and L&A offers significant opportunity.
  • 58% of the insurers IT budget is increasing with 80% of IT budget apportioned to core, data and digital.
  • In US, more than 25% of insurers are replacing core systems, more than 25% planning major enhancements and more than 25% are going for total replacement and enhancement. (Source: www.novartica.com)
  • Acquisitions has helped boost revenue through cross selling. No competitor has an all-round solution comprising consulting service, core software suite, digital assets and data service under single roof.
  • With the Insurance business environment radically shifting and around 48% of the Insurers increasing their investment in cloud services, Majesco is already in a unique positon to serve with its core software, digital and data extensions and scalable cloud platform.

Majesco value Chain:

Client Profile:

Risk & Concerns:

  • Client Concentration: Revenue contribution from top 5 and top 10 clients has reduced however the % share of revenue from Top Clients is still a concern

  • High R&D/S&M : R&D expenditure remains the key driver for margin expansion. As of now, rise in R&D and S&M spends remain a key risk to value and sustainable earnings is the necessary trigger.

Investment Rationale:
Majesco, the spin-off of Mastek Ltd. has registered its presence in cloud based P&C and L&A insurance industry platform offers tremendous demand for modern core systems. Very few or no competitor offer support for both group and individual business. Insurance industry being a $4.6 trillion market, is only second after media and entertainment to face major disruption.
Majesco has its presence in 6 countries with 2500+ staffs and has done successful acquisitions in last 10 years with an investment of $100 million. The company with over 164 clients globally has registered growth of 23% CAGR in last 2 years and expects to reach revenue of $200-225 million in next two years.

• Order book of $158 million in FY16
• Ended FY16 with 12 months backlog of $73.1 million, up by 46%
• Revenue up from $79.3 million in FY15 to $113.3 million in FY16
• Rise in Gross margin from 38.5% to 44.5%
• Increased spending on R&D and S&M, 29.5% of the revenue
• Revenue from new account up from 9.8% of the total revenue in FY15 to 14.0% in FY16
• Revenue guidance of $200-225 million by FY18 with EBITDA at 12-14%

At CMP of Rs. 566, Majesco is trading at EV/Sales of 2.08 its FY16 revenue and 1.18 and 1.05 its FY17E and FY18E respectively, which is steeply undervalued compared to its global peers Guidewire Software and Sapiens(less profitable company) trading at 9.19x and 2.67x respectively. Majesco is positioned to gain market share with increasing scalability and higher revenue growth and profitability due to huge cross selling opportunity in P&C and L&C cloud business.

Disclosure: Not Invested.


#2

Thanks for starting the thread! This company has some strengths which need to be discussed.

Analysts like Celent and Gartner have rated Majesco’s suite of products for the US P&C insurance market among the top 3

Its billing software is actually among the best of the lot and highly rated.

Cloud offering a key differentiation. Major competitors do not offer it yet and among small and mid-size players this is a big hit.

an " American" company due to its listing on Nasdaq but cost base will remain low due to Indian roots and product development centre. It has best of both worlds.

It has indicated that only gap in its offering is front end or digital and they took approval to raise 250cr/$37mn. It remains to be seen how it is structured for acquisition. I think the dilution will not be that bad since it will help it increase stake in US subsidiary which is the sole bread earner.

Disc: Holding and transactions done recently


(sanjayjalindhra) #3

Thank you @sumi00 for acknowledging my first post on @valuepickr. Yes, looking at the competitive advantage the company has got and the major disruption that’s happening in US and other regions in the insurance industry, the future looks promising for Majesco.
Disclosure: Not invested (Sorry for not mentioning in the original post)


(butun) #4

This company seems to have a chunky “other expense” which is growing quarter over quarter. any idea what is that? and what are the risks in investment?


(umang_1991) #5

Companies like Majesco shows high promise but they dont have anything in their financial statements. Isint it prudent to wait for the company to start delivering on the promising? As of now what we have is air, things may or may not go the way they are suppose to be…


(sanjayjalindhra) #6

Triggers:

  1. New client additions

  2. Major disruption in the insurance technology industry, and new products in cloud offering by the company

  3. Improvement in order backlog.


#7

Well, which multibagger stock has shown promise through financial statements alone? The opportunity size for insurance software products is 10-15bn USD and they are guiding for $200-225m sales and 12-14% EBITDA margin by FY18 while they are number 3 in this biz. Their D&A is low since they expense all product development costs(~10-15% of sales). PAT could be $20m showing EPS of 40-50 by FY18. This is hockey stick type of earning curve. Management is clean and has delivered more than they have promised so far.

This is almost sunrise type of industry within IT sector. One should note that every player is investing heavily in product development and hence losses at PAT level. These companies are measured on EV/sales method till PAT normalises. On that basis this is a very cheap stock.

Disc: Invested and this is no recommendation to buy or sell


(butun) #8

how did you get to pat of $20m?


#9

EBITDA - $25-32m, D&A - $3-4m. Other income = Interest outgo, and tax rate of 25% considering earlier losses and tax credits. You get base case of $20m but could be between $15-25m depending on other factors.


(Bheeshma Sanghani) #10

Income is 740cr (Mar16) & Employee Exp is about 506 cr. at 68% isnt that high? I thought IT companies generally had a sales to employee exp ratio of about 50%.


(umang_1991) #11
  1. You are right no new great companies cant be found basis reported financials but than mortality too is very high.
  2. My only concern is that market size, opportunity have been there since ages, but now suddenly why people are believing that this company would capture market. Company may or may not deliver but we must investigate as to what has changed on the ground which would enable the company to bag more business

(sanjayjalindhra) #12

@umang_1991, the industry is facing major disruption in the systems they have been using since ages which now are been replaced or upgraded. Majesco, with its keen focus on new developments is believed to capture market with its cloud based systems and L&A segment.


(ASPN) #13

@sanjayjalindhra , you have rightly pointed out the reason. To add to that, it may be noted that all top IT service providers has a vertical/division of ‘I’ (Insurance) in the BFSI space. But there are not many players focused solely on Insurance space only. Such an IT vendor (like Majesco) is likely to be preferred by Insurance providers


(umang_1991) #14

So basically we are down to one trigger that most of the insurance company will upgrade their legacy system to some new age system of which Majesco is third ranked player. So my counter argument would be

  1. I am sure this opportunity hasn’t arrived all of a sudden, this must me present since past many years as it competitor Gildwire is a large player. So whats so special about Majesco that it would capture market share going ahead (anything which it hasn’t done in the past and its doing differently right now).

#15

Correct on your first observation. They have reported Fy16 sales of 700cr+ obviously it did not come in one year rather has a history of more than a decade as joint entity with Mastek.

On competitive strength you need to start with what Gartner and others say about its different modules and the momentum in order bookings for what clients want to convey.

Since these are B2B businesses, one need to have trust on what management wants to communicate untill they are found untrustworthy.


(sanjayjalindhra) #16

Can’t say why Guidewire has no such package which Majesco offer right now, which is providing a complete solution to its client from data to billing, and also in cloud based system also, it is the only provider till now. As per Novartica’s research report, cloud based solutions is the next big thing. Insurers sooner or later have to build such systems or perish.


(umang_1991) #17

Great so w have 20-30% of revenue growth build in. So major challenge would be to keep R&D and SG&A costs down and we have very good operating leverage kicking in. Easy money has been minted on Majesco now the results would drive the price. Things to watch 1. Revenue growth 2. R&D expense as % of sales 3. SG&A a % of sales.
And if company is moving close to profitability.

Talking about Guidewire, US market is expecting company to grow rapidly (driven by products licences and growing market for insurance IT). The stock is richly priced as so Majesco appears to be a bargain but thats because Guidewire is mainly a product company and high margin play. Cloud could be a game changer for Majesco as Guidewire is not focusing there.

http://seekingalpha.com/article/3979291-guidewire-softwares-gwre-ceo-marcus-ryu-q3-2016-results-earnings-call-transcript?part=single

Seeking alpha analyst on Guidewire

HDFC report on Majesco

ICICI direct report on Majesco

India Nivesh Views on Majesco

Another point to ponder is that the company is looking to dilute its equity via QIP, any views on this?

Would also like to add wizkid investor ASHISH KALCHOLIA is invested in it. and Lic too :wink:


(Parag) #18

Getting into profitability should not be a problem for Majesco. They could show increased profitability even today if capitalized their R&D and some part of sales and marketing expenses. US GAPP account standard (relevant for Majesco as they are also listed in NYSE) allow capitalizing R&D. Even Intellect Design (erstwhile Polaris) has started capitalizing it since last few quarters.

Logically, if we see, most of the benefit of R&D will accrue in next few years and not immediately. If management wants, they could have done it, but they have chosen to be conservative. I am not sure if they will do it in future, but at this moment, they are expensing all R&D, which is good for a long term shareholder.

In the US, Guidewire is a leading company and reading through the conference call posted (above link) the second player is DuchCreek (spin off from Accenture), and Guidewire management has not mentioned about Majesco at all. Based on Majesco’s (and Guidewire’s) management commentary , it looks that Majesco is the third player in the US insurance market.

Guidewire is focused on P&C, and General Insurance segment, whereas Majesco also has products in Life, Annuity, and Pension (in addition to P&C products). Management has said that in the UK, their product (L&A) caters to 42% of market in this segment, which is a good marketing point for the company as well as it demonstrates depth of experience in the segment

A lot of product wins- and clouds wins- are to the tune of 5 to 10 years. So once the client buys in their product, they have a high switching cost, which is good for Majesco, so it has a decent moat.

Majesco’s current focus in the US now, but they could certainly be more aggressive in other English speaking countries like US, Australia, and New Zeland. So addressable market is huge for them.

I am not sure why they are raising 250cr. They have not mentioned this in their latest con call (in US and India). Earlier management has said they would acquire a company is the US and can use NYSE stocks as a currency. So not sure why they are raising some much money. I am sure Mastek (and Majesco) has not raised 250 cr so far in their company history. I think they would elaborate the reason in Q1 con call.I am sure they would have a convincing reason… but it is certainly not great news for existing shareholder…

I think next 12 months will be crucial for the company. If they deliver to what they have promised, the stock could give a decent return. The management is promising revenue growth of 25- 30% (approx.) in next two years and profitability will improve more in second year asymmetrically.

There are a lot of IT companies listed in India, but not many product company and Majesco offer opportunity if someone is looking for a bumpy ride.

Note- I am invested in the stock.


#19

Their suite of offerings has one gap and that is digital front end. They are trying to do to fill the gap by acquiring something available rather than building from scratch.


(Parag) #20

I think that is a good thing. As a product company, you do not want to build everything from scratch. The company needs best of breed solution and if it is readily available in the market, then it makes sense to buy the solution upfront.

Another reason for acquiring a company is they get ready-made customers, and there are good opportunity to cross-sell different product to them.

In fact, this is (customer acquisition) is one of the reasons Majesco bought Cover-All last year. They still see huge cross-sell the opportunity to them.