BP Equities_Majesco Ltd Errclub Long Term Investment Idea

2ndFeb,2011

Majesco Ltd

Share Holding Pattern (%)

Sector Outlook Positive

CMP (Rs) 306

Target Price (Rs) 460

BSE code 539289

NSE Symbol MAJESCO

Bloomberg MJCO IN

Reuters NA

Key Data

Nifty 8,002

52WeekH/L(Rs) 363 / 289

O/s Shares (mn) 22.5

Market Cap (Rs bn) 7

Average volume

3 months NA

6 months NA

1 year NA

Stock

Face Value (Rs) 5

Relative Price Chart

Research Analyst Amit Chandra [email protected] 022-61596407/08

Company Background Majesco Ltd (MJCO) is the spin-off business unit of Mastek Ltd which got listed in NSE & BSE on 19th Aug 2015. Majesco is a core software solution provider to the US Property & Casualty/General Insur-ance (P&C), and Life, Annuities & Pensions (L&A) insurance companies. MJCO provides services policy administration, claims management and billing and has a highly rated platform from leading US rating agencies like Gartner and Celent. The company recently got listed in NYSE after acquiring Cover-All technologies and Agile in the US. The combined entity has a revenue of US$ 106 mn in FY15. total 140 customers and employees ~1850 insurance professionals having a global foot print in US, Canada, UK, Malaysia, Thailand and India. The company Insurance business has growth strongly in the past three years with Insurance grew at a CAGR of ~22% and P&C clocked a CAGR of 36% in FY12-15. The company derives ~88% revenues from US market and 6% from UK. Insurance business contributes is 96% of total business

Immense opportunity in US Property & Casualty (P&C) Insurance market The US P&C insurance is a big market with Insurance IT spend for external software and services in the range of US$ 44 bn (according to Novarica 2015 report). The total premium underwritten by top US P&C insurers was in the range of ~US$ 1,259 bn. Generally insurance companies spend ~3-4% of the premium on IT up-gradation which is ~US$44 bn. Out of this ~US$9 bn can migrate to third part vendors like Majesco and Guidewire, etc. The addressable market for Majesco is primarily related to billing, policy administration & claims, which is ~US$ 6-7 bn. At present only ~10-15% of the market is penetrated and Majesco remains one of the top 3 vendors in US P&C Insurance market, thus there lies immense opportunity. In insurance business ~83% is derived from US P&C Insurance (which is highly underpenetrated) and ~13% from Life and Annuity (L&A) insurance. There is huge growth opportuni-ties in the US P&C Insurance market and we believe this segment will drive growth going forward.

Insurance Business at an inflection point Mastek management has been aggressive in the recent past and the primary objective has been to achieve scale in its Insurance platform business. The demerger of Insurance and IT services business, listing of Majesco in NYSE, was a step towards greater focus on Insurance vertical. Further, the com-pany acquired Agile Technologies (US based USD 9 mn annual revenue run-rate, 20 clients and 50 employees consulting services company) and acquired the NYSE listed Cover-All Technologies (Sales US $20mn annually, 30 clients and 150 employees) which is focused on providing solutions to the property and casualty insurance sector. Majesco has revenues of US$106 mn in FY15 with over 140 clients. The new scale will 1) help the company to bid for larger deals, 2) cross sell existing services to Agile and Cover-All clients, 3) will be able to attract the best talent from the US market (which is very critical factor for a product company), 4) achieve scale and size, 5) will have increased visibility and 6) will be benchmarked with the best in US insurance industry. We remain very positive on the growth prospects on Majesco US and expect growth to accelerate from FY16E onwards.

Highly rated Majesco Insurance Platform - will lead to scaling up and margins improvement Majesco has been rated by Gartner and has been among the top 3 vendors in the US P&C market. Gartner has placed Majesco platform in the leaders quadrant and it is one of the few Indian product companies to be highly rated by reputed analysts in the US and UK. Gartner, in its Market Scope re-port has rated Majesco in the promising column which shows the strength of the platform. Guidewire which is a close competitor to Majesco in the North American P&C Insurance market comes in the strong positive column. The Majesco platform has also received rating from various other reputed agencies like Celent, Novarica. Majesco is a high gross margin and low net profit margin business be-cause of high investment in R&D and Sales & Marketing. The business has huge potential for scaling up and generate strong cash flows. Majesco now commands a gross margin of 41.2% (after acquisi-tions) and invests ~14% of sales in R&D. We expect the EBITDA margin to expand ~400 bps to ~6% in FY16E.

Management optimisticlikely to clock revenue CAGR of 23% for FY15-18E Management is optimistic about the growth prospects of the company has listed the goals for the next three years. They expect the company revenues to reach ~US$ 200-225 mn in FY18E which results in a revenue CAGR of 23% (taking the lower end) in FY15-18E. Further on the margins front the com-pany expects EBIT margin to be in higher single digit (9-10%) from current loss at EBIT level. We be-lieve there are significant margin levers available however this will depend of the top-line growth, be-cause its a non linear business model and a high gross margin business. We expect the revue to grow at a CAGR of ~20% for FY15-18E and EBIT margin to stand at ~ 6% in FY18E.

IT Products | Company Update 28th Aug, 2015

Buy

BUY HOLD SELL

> 15% -5% to 15% < -5%

Stock Rating

B P W E A L T H

Majesco Ltd Company Update

Institutional Research BP Equities Pvt. Limited (www.bpwealth.com) 28-08-2015

BP Equities reports are also available on website www.bpwealth.com 2

B P W E A LT H

Source: Company presentation, 10K filing, BP Equities Research

Valuation & Outlook

In view of listing of Majesco in NYSE (currently trading at US$ 4.9), huge opportunity in the US P&C Insurance market, increased management focus on developing non-linear IP-led insurance business, revenue growth drivers in place for Majesco along with improvement in margins, we remain positive on the future prospects of the company. Majesco Ltd Insurance Business will be comparable to US listed peers

Majesco is rated among the top 3 Insurance platform vendors in North American market and has 9 out of top 25 Insurance players as its clients. It is also a leader in P&C billing solutions and is comparable to Guidewire a US listed Major P&C Insurance player. Majesco has ~140 active clients as compared to ~183 for Guidewire. In terms of valuation Guidewire trades a EV/Sales of ~6.7x FY17E. We have valued Majesco taking 75% discount to Guidewire valuations and have taken a holding company dis-count of 35% (average holding company discount is ~30%). We have assigned a EV/Sales of 1.7x to Majesco FY17E Sales of Rs 9.3 bn to arrive at a EV of Rs 15.7 bn. Taking the holding company dis-count the EV comes in at Rs 10.2 mn. The Majesco valuation comes in at Rs 460/share. We have taken three scenarios where in top line growth in US$ for FY17E has been taken as 15%/29%/41% for bear/base/bull case respectively. The bear case price target comes in at Rs 309/share while the bull case comes in at Rs 651/share. We have a BUY rating on the stock with a target price of Rs 460 (upside of 50% from CMP). The stock currently trades at a EV/Sales of 0.9x/0.7x FY16E and FY17E estimates.

Majesco Limited (Rs mn) FY14 FY15 FY16E FY17E FY18E Revenue (US$ mn) 84 82 115 148 187 Growth % -2.4% 41.2% 28.6% 26.0% Revenue 5,070 4,993 7,267 9,344 11,770 EBITDA 301 107 436 748 1,177 EBITDA Margin % 5.9% 2.1% 6.0% 8.0% 10.0% Adj. EBITDA (Without Product Development Exp) 875 743 1,308 1,869 2,589 Adj. EBITDA Margin % 17% 15% 18% 20% 22% Product Development % of Sales 11% 13% 12% 12% 12% EBIT 142 (46) 214 462 817 EBIT Margin % 2.8% -0.9% 2.9% 4.9% 6.9% Dep * 159 153 222 286 360 PBT * 142 (46) 214 462 817 Tax * 21 (11) 51 111 196 PAT * 67 (35) 162 351 621 PAT Margin % 1.3% -0.7% 2.2% 3.8% 5.3% EPS Rs 3.0 (1.5) 7.2 15.6 27.5

Financial Highlights

Majesco (Insurance business) Bear Case Base Case Bull Case Sales (FY17E) (Rs mn) 8,409 9,344 10,278 Guidewire (EV/Sales) (x) 6.7 6.7 6.7 Discount to Guidewire Valuations % 80% 75% 70% Target (EV/Sales) (x) 1.3 1.7 2.0 Majesco EV (Rs mn) 11,269 15,651 20,659 Holding Discount % 40% 35% 30% EV (Rs mn) 6,761 10,173 14,461 Less:Debt (Rs mn) 189 189 189 Add:Cash (Rs mn) 395 395 395 Market Cap (Rs mn) 6,967 10,379 14,667 No of Shares (Rs mn) 22.5 22.5 22.5 Price per share (Rs) 309 460 651 Source: Company, 10K filings, BP Equities Research




B P W E A LT H

Huge Cross selling Opportunities, recent acquisitions to trigger growth

The company acquired Agile Technologies which is a US based USD 9 mn revenue run-rate, 20 cli-ents and 50 employees consulting services company focusing on the insurance vertical. The company also acquired the NYSE-listed Cover-All Technologies (Sales US $20mn, 30clients and 150 employ-ees) which is focused on providing solutions to the property and casualty insurance sector. We believe that Majesco will be able to integrate into Cover-All comfortably as the size of Cover-All is one fourth of Majesco and have the same domain expertise and capabilities. There is huge growth opportunities in the US P&C Insurance market and we believe there is significant cross selling opportunities present as well. We expect the company to get ~US$20mn from cross selling opportunities.

North Americs P&C Customers by software solutions

Source: Company Presentation, BP Equities Research

Source: Company, BP Equities Research

Majesco US business structure




B P W E A LT H

Highly rated Platform and well recognized industry player

Majesco Operational Metrics (FY15)


Majesco has been rated by Gartner and has been among the top 3 vendors in the US P&C market. Gartner has placed Majesco platform in the leaders quadrant and it is one of the few Indian product companies to be highly rated by reputed analysts in the US and UK


The companys Insurance platforms is ranked 3rd in Policy (Domain:-P&C Core by Rating Agency Gartner) and 1st in Billing (Domain:- Enterprise Solutions by Rating Agency Celent). The depicts the strong domain knowledge and the company has been able to grow its customers from 30 in FY08 to 100 customers in FY15. We expect the company will leverage the strong domain knowledge to win clients and penetrate more in US P&C market.




B P W E A LT H

Strong platform and acquisitions leads to strong clients additions

The company has been strongly growing its customers in the P&C Insurance vertical in the North American market. The biggest problem faced by the company in the past was long sales cycles as insurers were hesitant to switch from their 30-year-old systems that have become core to them. Ma-jesco now has more than 140 customers( including the recently acquired Agile and Cover-All), hence it becomes easier to convince potential new customers to make the move to the new and enhanced platform. Further, increase in clients also help the company to bid for larger deals. Additionally, the re-architecture of various models in policy administration solutions enhances client acceptance level. We believe listing of Majesco in the US stock exchanges and higher scale of operation (in terms of clients and top line) will help the company to win more and big deals.

Customers addition for Majesco has been robust

Source: Company Presentations, BP Equities Research

Nine out of the top 25 US P&C insurance carriers are Majesco customers

2005 3

Customers

2007

10+ Customers

2008

35+Customers

2013

80+ Customers

2015

140+Customers

P&C Insurance market has immense opportunities US Market Size US$ Bn US Insurance Market Premium $1,259.0 IT Expense (% of Premium) 3.5% US Annual IT Expense $44.1 Staff (40%) $17.6 External Services & Staffing (15%) $6.6 Maintenance / Support Fees (15%) $6.6 New Hardware / Software (12%) $5.3 Others (Desktops, Networks etc.) (18%) $7.9 Market Opportunity $18.5 Addressable US Market Opportunity (50%) $9.3


The addressable market for Majesco is primarily related to billing, policy administration & claims, which is ~US$ 9.3 bn market. At present only ~10-15% of the market is penetrated and Majesco remains is one of the top 3 vendors in US P&C Insurance market, thus there lies immense opportunity.




B P W E A LT H

The core nature of the Insurance business is long termSticky Revenue Model

Insurance business is a large and vibrant marketplace that values long term partner relationships based upon software quality, performance and delivery success. Once a customer moves to Majesco platform, there is high probability that it will remain there for the next 10-15 years. The reason is that the system becomes so core to client that the data migration and workflow changes necessary for the move make it impossible for the client to do it more often. Thus the companys revenue visibility is pretty robust (75% of revenue visibility on day one of the Fiscal). We believe that Majesco robust & proven platform, solid & highly predictable business model provides revenue visibility.

Ageing P&C Insurance platforms needs a reboot

All leading US P&C Insurance players are running on old legacy systems, some of them are around 30 years old. The property and casualty (P&C) U.S insurance industry is primarily dependent upon in house developed or third-party mainframe systems. These systems are old and is hurting the industry due to 1) Inefficiency and inflexibility of existing P&C IT systems 2) ageing IT infrastructure 3) outdated technology 4) increased importance of new payment methods and channels and 5) unable to with-stand increased competition environment. There is immense need for these P&C insurance compa-nies to adopt to newer technologies and shift work to third part software platforms. This provides them efficiency result in cost saving, in some cases operating margin expansion is in the range if 2-3%.

Insurance Transformation Business Line Market Maturity

Source: Company Presentations, BP Equities Research

Key Concerns

Delay in ramp up of Majesco US

We have assumed that Majesco business is at a inflection point and going forward the company will be able to scale up revenue growth. Any delay in ramp up will be a risk to our assumptions.

More than expected rise in product development cost

Product development and R&D is significant part for a product company. We have assumed the R&D cost to remain at a constant level as a % of sales. Any unexpected ramp up in R&D and Sales & mar-keting expenses will dent margins going forward.

Research Desk Tel: +91 22 61596406

Disclaimer Appendix

Institutional Sales Desk Tel: +91 22 61596403/04/05

Analyst (s) holding in the Stock : Nil

Analyst (s) Certification:

We analysts and the authors of this report, hereby certify that all of the views expressed in this research report accurately reflect our per-sonal views about any and all of the subject issuer (s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation (s) or view (s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the BP Equities Pvt. Ltd. (Institutional Equities).

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