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Mastek Limited - Midsize IT company

Mastek is a 30+ year old IT company. It operates majorly in 2 segments – insurance products and government solutions. The company has planned to unlock value via demerger, acquisitions and NYSE listing.

  • The company has decided to demerge its insurance products & allied services into Majesco India while the other IT Services will be with Mastek India.
  • The US arm of Majesco will be merged with Cover All Technologies which is an US listed company. The merged entity will be listed in NYSE MKT under the name of Majesco.
  • The demerged and listed Indian entity Majesco Ltd will hold 83.5% of the US listed Majesco

I feel that the Majesco US listing will be a game changer. For one the company has invested a lot of time and money in R and D. It is about to gain the benefits. The products for Insurance companies take months to go live with huge data conversion, interface with legacy systems etc. After these systems go live they are not disturbed for years.

Majesco products are world class and acknowledged by the top analysts. Huge cross selling opportunities are available between Majesco, Agile technologies and Cover All.

Gartner’s Magic Quadrant for P&C Insurance Policy Management Modules


At the same time Cover – All is also a well know Insurance product company

Guidewire Software (NASDAQ:GWRE) is the No 1 in Insurance Products. The company has a market cap of $3.54 billion. For 2014, Guidewire had revenue of $350 million and net income of $14.72 million.

The merged Majesco US pro forma financials for 2014: Revenue of $106 million and net income loss of $0.2 million. R and D expenses $12 million

ICICIDirect and Anand Rathi have covered this demerger. Their reports are available in Researchbytes.com

ST Triggers

May 2015: Mastek Demerger date announcement
29 May 2015: Listing of Majesco US in NYSE Next
July – August: Listing of Majesco India in BSE / NSE

Disclosure: Invested.
Thanks to Anand Mohan for pointing out this special situation and other inputs

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Hi Dubyrex,

What is your expectation on upside from the current levels and also have done any work around valuations by any chance?

Hi Dubryex,

Thats quite informative analysis. Indianivesh is recommending the company from sub 200 levels. Recently it has come out with an update and has upgraded the target price from 554 to 724.
http://indianivesh.accordfintech.com/Downloads/635671016654950000_NiveshMonthly_-_May_2015.pdf

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Disclosure : Invested from lower levels

Date: 16-May-2015 CMP: Rs 410 Mcap: Rs 925 Cr

Some targets

Capital Market:
Mastek’s US-based subsidiary Majesco received the clearance from the NYSE Listing Committee for listing of Majesco shares. This is a major milestone. Majesco will go for listing of its shares on the NYSE on successful completion of the shareholders’ vote approving Cover-All’s Technologies merger with itself. The merger is expected to be completed by June 2015. Majesco acquired Cover-All’s Technologies in December 2014 in an all-share deal. Majesco issued 16.5% of its shares. Majesco offers core insurance technology software and information technology services to around 100 insurance carries that are into property and casualty, life and annuity.

The software solutions and services include policy administration, billing, claims and distribution. The combined entity, Majesco and Cover-All’s Technologies, will have over US$100 million in estimated annual revenue and around 150 insurance customers. Tracking developments at Majesco, software provider Mastek had a decent run-up on the trading floor. The stock reported a five-year high of Rs 513.5 in March 2015. From a 52-week low of Rs 160.2 in May 2014, it has jumped 2.7 times to the present level of Rs 435.6. The stock is likely to remain in the limelight till the listing of Majesco. Interestingly, based on the Majesco and Cover-All’s Technologies deal, Majesco will be worth around Rs 1100 crore. Small-cap Mastek was valued at Rs 873 crore on 30 April 2015.

ICICIDirect:
By end of 2015 : Target of Rs 600 (base case) and Rs 890 (best case)

Anand Rathi:
Target of Rs 620

India Nivesh: (Thanks to Advait Pande. I had seen the old report only which had target of Rs 554)
Target of Rs 724

I frankly do not have a target. At the sametime I do have a very very rough guestimate.

Mastek (Solutions)
FY 2014-15
Revenue:Rs 513.3 Cr EBITDA:Rs 55.6 Cr (before exceptional items) [Company provided]
NP: Rs 20-30 Cr [My guess]
Mcap : Rs 300 Cr [Again my guesstimate]

Majesco India (Holding company of Majesco US)
Since Majesco India and Majesco US are product based companies , will use Sales / Mcap

Cover-all Revenue (2014): $20.5 million . Mcap : $28 million
Majesco US Revenue after merger : $106 million. Mcap: $ 212 million (My guesstimate)

Post-merger of the Cover-All entity with Majesco, the Majesco India Limited will hold 69.7% of the Majesco US arm, and Mastek UK Limited will have 13.8% shareholding in Majesco.Remaining 16.5% will be with Cover-All shareholders.The stake which belongs to Majesco India translates to $ 148 million

Since Majesco India will be holding company, we need to discount the above by some %. I will use 40%. Thus Majesco India will have a value of $88 million. This translates into approx Rs 554 Cr.

The above is a worst case scenario and is also just to illustrate the the thought process. Though the current mcap is Rs 925 , my calculations show a combined market cap of Rs 854 Cr. I have not included the 13.8% stake of Majesco US held by Mastek UK in the valuation. Mastek UK is 100% subsidairy of the Mastek solutions division. The management has already said they may monetize this stake in future for the benefit of Mastek (demerged) Services division. The value of the 13.8% amounts to Rs 184 crore (assuming mcap of Majesco US as $ 212 million and no holding discount).

Before we form a opinion please play around with a couple of numbers.

(1). The Mcap/Sales ratio I have used for the above calculation is 2 whereas the No 1 company in the Insurance products is Guidewire has MCap/Sales ratio of 9.36. Guidewire Mcap : $3.46 billion. Sales (ttm) : $ 369.42 million Net Income (ttm) $18.82 million.

Thus the scope for playing with the Mcap/Sales ratio is huge and I think I have taken a very conservative figure by using 2 instead of using 1.35 which is got by extra polating Cover-All current Mcap/sales. (Cover- All current revenues are $20.5 million and the pro forma merged revenue of Majesco US will be $ 106 million)

(2). The holding company discount again is debatable. Anand Rathi is using 35% discount whereas ICICIDirect is using 25%. India Nivesh - 30%. I have used 40%.

Playing with the above 2 points, will vary the vaulations hugely. My valuation excercise was not to discover the target, rather it was to find the downside. IMHO, the stock does not have much downside after the demerger. If you can hold the shares for more than 1 year , the downsides are even more reduced.

Top notch senior mgmt additions (non desis too) in Majesco US and recent insider buying has also strengthened my conviction.

My strategy as of now (it is very fluid now and may/may not change) is to sell the Mastek India shares some time after the demerger, to retrieve some/most of my investments and hold Majesco India shares for a longer time frame

BSE Updates

Security Code : 523704 Company : MASTEK

Updates on Scheme of Arrangement 26 May 2015 11:22
Mastek Ltd has informed BSE that on April 30, 2015, the Hon. High Cdurt of Gujarat and Hon. High Court of Bombay have approved the Scheme of Arrangement, which was earlier approved by the Stock Exchange on December 09, 2014. The copy of the formal orders received from respective Courts.

http://www.bseindia.com/corporates/anndet_new.aspx?newsid=6a849faf-f6f1-4d49-851e-ffc2cb709d20

Mastek Ltd has informed BSE that the June 15, 2015 has been fixed as the Record Date for the purpose of determining the members of Mastek Limited to whom shares of the Minefields Computers Limited will be allotted in the ratio of 1:1 pursuant to Part II of the Scheme of Arrangement in terms of clause 11.1.1.

Hi Dubyrex,

To put it simply, the persons who are shareholders of Mastek Ltd as on June 15, 2015 are entitled to get the shares of demerged Majesco Ltd.

Is the understanding correct?

Yes. Your understanding is correct. ( there is a restriction of minimum of 20 words / post, so could not post a standalone yes :slight_smile: )

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The below customer wins are for cover-all and have not been announced in the bse site by Mastek. The benefits will be for the merged US Majesco entity

http://www.cover-all.com/press-news/cover-momentum-continues-new-customer/

Jun 3, 2015
Cover-All Policy with Bureau / Non-Bureau Products and Configuration Central to Customer’s Speed to Market Plans

Morristown, New Jersey, June 3, 2015 – Cover-All Technologies Inc. (NYSE MKT: COVR), a leading provider of innovative and modern P/C insurance software solutions, announced today that it has signed an agreement with an insurance carrier for Cover-All Policy with Bureau and Non-Bureau Products. This new customer will be in addition to three new customer agreements announced in May 2015.

The new customer is a mid-size regional carrier in the southern region of the U.S. They will be implementing Cover-All Policy for various bureau-based products such as BOP, commercial package (property, general liability, inland marine, and crime), commercial auto as well as non-bureau based products such as personal/commercial/farm umbrella, farm liability, and special classes inland marine. This additional new agreement highlights the breadth and capability of Cover-All’s solution to support bureau and non-bureau products in an increasingly shifting and competitive marketplace.

“We are very pleased to have another new customer contract resulting in four new customer contracts this year so far. The market’s reception towards our solutions is encouraging and we are excited about the long-term relationships these new customers represent. We remain focused on customer needs and success within all aspects of our operations.” said Manish Shah, president and CEO of Cover-All.

Hi,

Mastek has given the spin-off day as 12th June, while the record date is 15th June.
I’m not clear over the stock price adjustment date, ie whether it will happen on 12th or 15th.
If the stock price adjustment takes place on 12th and I sell the shares on that day, will i still be entitle for Majesco shares.
In case of Adani Enterprises ltd, the spin-off date was 3rd June and record date was 4th June. Stock price adjustment took place on 3rd June.

The way it works is : record date - 2 trading days is the last date to buy.

Example:
Record date: 15th of the month
Ex-date: 14th of the month
Last date to buy: 13th of the month

Because if you buy on 13th, the stock will be there in your demat on 15th of the month (T+2).
Anyone who buys on 14th will not have shares in demat in record date. Hence, the stock will trade ex on 14th

Hope this answer your query.

13th / 14th are Saturday / Sunday.

Using Sandeeps above post

Record date: 15th of the month
Ex-date: 12th of the month
Last date to buy: 11th of the month

could someone explain the timeframe for this valuation to catch up. i mean only for the demerger part and unlocking the value

To answer your Question in a sentence. "SELL on 12th June and YOU WILL BE eligible for Majesco shares.

Today Mastek debuted on the bourses after the Majesco business was demerged. The closing price of Mastek was Rs 149 Rs and MCap of Rs 340 Crores. Though it looks very disappointing , it was around the expected lines.

ICICIDirect in their report had put in 3 cases for Mastek Solutions

Current Case: Rs 280 Cr (Mcap)
Base Case: Rs 310 Cr (Mcap)
Best Case: Rs 340 Cr (Mcap)

Seems their best case was on the dot

IndiaNivesh in their report had kept 2 scenarios for Mastek. Scenario 1: Rs 175 and Scenario 2: Rs 185
Anand Rathi had given a valuation of Rs 436 Cr for Mastek + Rs 226 Cr [for the 13.8% stake in Majesco US]
Yours truly had guessed Rs 300 Cr for Mastek + Rs 184 Cr [for the 13.8% stake in Majesco US]

Having said that ICICIDirect was on the dot, we cannot rule out the others because their target was not for the demerger date but rather a year time frame.

All in all it looks like things are on course and the next important date would be around the 1st week of July when Majesco will be listed in the US Bourse

Disclosure : Bought at an average price of Rs 407. Holding as of now. Will review my holding during listing of Majesco US (Expected 1st week of July)

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Shareholders of Cover-All Technologies consider a possible merger with Majesco, US subsidiary of Mastek
By Ranjit Shinde, ET Bureau | 22 Jun, 2015, 06.51AM IST

ET Intelligence Group: It is a crucial day for investors of Mastek, a Mumbai head quartered software solutions player. The shareholders of the New Jersey based Cover-All Technologies will today consider a possible merger with Majesco — the US subsidiary of Mastek. If Majesco succeeds in getting the approval, the combined entity will become a formidable player in the US mid-tier property and casualty (P&C) insurance market.

The stock was upgraded by brokerages a year ago, soon after it announced the insurance business would be listed separately. Since then, the stock has doubled. Cover-All was acquired by Majesco in December 2014 in all stock deal. Majesco India holds 69.7% in Majesco US; while Cover-All holds 16.5% following the acquisition deal. Majesco India is fully-owned by Mastek.

Since the acquisition, Mastek shares have gone up 65% with investors betting on a future merger that they believed would unlock value and generate synergies.

Now, if Cover-All shareholders reject the merger plan today, it will delay Majesco’s growth objectives, impacting valuation of its Indian parent, Mastek. On the contrary, if it wins the approval, Majesco may witness a grand listing on NYSE by the end of June — an outcome that would have a positive rub off on the Mastek stock.

After being a traditional software player for over three decades, Mastek took a major step last year to carve out its fast-growing insurance vertical into a separate company.

This created two companies: Mastek houses the IT applications business with revenue of $85 million while the insurance business across US, Europe, Canada, and India is organised under Majesco India which has a top line of $77 million. Some months later in December 2014, Majesco’s US subsidiary acquired Agile Technologies and Cover-All, both active in the US insurance market.These acquisitions boosted the insurance revenue by nearly 50% to over $106 million.

Cover-All is listed on NYSE, which means a successful merger will pave way for Majesco US to list on the American stock exchange. Over the past six months, Majesco has fulfilled the requirements and has also obtained clearance from the NYSE Listing Committee. Listing on a major US exchange is crucial for Majesco. “Along with improved exposure to our addressable market, a US listing will improve our access to capital and help us acquire talent,” said Farid Kazani, MD, Majescco.

In the US, a major insurance market, companies are replacing legacy IT systems with new technologies. According to Kazani, Majesco’s “addressable market size” in the US P&C insurance sector is $3-4 billion. For Majesco, P&C is a major division contributing 70% to total revenue while the balance comes from life and annuity segment.

http://www.bseindia.com/corporates/anndet_new.aspx?newsid=61fa3764-6722-473a-8f15-c8d737b50576

Press Release issued by Cover-All Technologies Inc., a company merging into Majesco, USA 23 Jun 2015 13:14

Mastek Ltd has submitted to BSE a copy of the Press Release made on June 23, 2015 by Cover-All Technologies Inc. announcing that > its shareholders have approved Cover-AII’s adoption of the Agreement and Plan of Merger into Majesco, USA, a subsidiary of Majesco Limited, India.

The said agreements were signed on December 14, 2014 and amended on February 18, 2015.

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Mastek is locked in UC for past couple of days, probably because of the positive news :point_up_2:. However, it is entering into fairly valued territory, as this news is positive for (newly formed and to be listed) Majesco and will not have any significant impact on Mastek IMHO.

Again, the listing of Majesco US on NYSE later this month/next month, will be the next trigger for Mastek (IMHO, the stock will be news driven till then) and may provide good exit opportunity. Am saying this because:

  1. Post demerger, there is no material distinction in the business/operations of standalone Mastek, as it is comparable with any of the Indian IT services company.
  2. Some headwinds looming/appearing for mid cap IT companies
    [ read: (i) http://www.moneycontrol.com/news/brokerage-recos-fundamental/avoid-value-trapsit-go-for-niche-midcaps-anand-rathi_1642581.html
    (ii) http://www.moneycontrol.com/news/business/persistent-warnsq1-profit-says-q2track_1625181.html?utm_source=IW_DATA_stockpage
    (iii) http://economictimes.indiatimes.com/nri/visa-and-immigration/as-barack-obamas-term-ends-immigration-and-visa-issues-may-hurt-indian-it-services-companies/articleshow/47579274.cms ]

What say ya Duby??

Standalone Mastek is probably fairly valued if we do not consider the 13.8% stake it has in Majesco US through Mastek UK, In one of the concalls the mgmt has said that they may monetize this stake for the needs of Mastek.

Mastek as a solutions company will face the hurdles you have mentioned in the above links but from a P&L stmt point of view it looks better because till now the R&D expenses of Majesco were dragging down the profits. With those expenses not present, it should show decent profits.

In an interview given yesterday in CNBC http://www.moneycontrol.com/news/business/acquisitions-diversification-to-lead-fy16-growth-mastek_1624201.html , Mastek CEO said that the company will generate Rs 40 - 50 Cr Cash / year and has around Rs 100-120 Cr cash.

Having said the above, at some point in the future, if I have to take out cash from this transaction, I would sell Mastek and hold on to Majesco India. Like you rightly said the next big trigger would be the Majesco US listing.

Btw the Majesco India shares were credited to my demat today