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2ndFeb,2011

Majesco Ltd

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BP WEALTH

28th Aug, 2015

IT Products | Company Update


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 Insurance (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

Stock Rating
BUY

HOLD

SELL

> 15%

-5% to 15%

< -5%

Sector Outlook
Stock
CMP (Rs)

306

Target Price (Rs)

460

Immense opportunity in US Property & Casualty (P&C) Insurance market

BSE code

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 opportunities in the US P&C Insurance market and we believe this segment will drive growth going forward.

NSE Symbol

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 company 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.

Positive

Bloomberg
Reuters

539289
MAJESCO
MJCO IN
NA

Key Data
Nifty

8,002

52WeekH/L(Rs)

363 / 289

O/s Shares (mn)

22.5

Market Cap (Rs bn)

Face Value (Rs)

Average volume
3 months

NA

6 months

NA

1 year

NA

Share Holding Pattern (%)

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 report 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 Relative Price Chart
agencies like Celent, Novarica. Majesco is a high gross margin and low net profit margin business because 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 acquisitions) 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 company expects EBIT margin to be in higher single digit (9-10%) from current loss at EBIT level. We believe there are significant margin levers available however this will depend of the top-line growth, because its a non linear business model and a high gross margin business. We expect the revue to Research Analyst
grow at a CAGR of ~20% for FY15-18E and EBIT margin to stand at ~ 6% in FY18E.
Amit Chandra
amitchandra@bpwealth.com
022-61596407/08

B P W E A LT H

Majesco Ltd

Company Update
Financial Highlights

Majesco Limited (Rs mn)

FY14

FY15

FY16E

FY17E

84

82

115

148

187

-2.4%

41.2%

28.6%

26.0%

5,070

4,993

7,267

9,344

11,770

301

107

436

748

1,177

5.9%

2.1%

6.0%

8.0%

10.0%

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%

142

(46)

214

462

817

2.8%

-0.9%

2.9%

4.9%

6.9%

Revenue (US$ mn)


Growth %
Revenue
EBITDA
EBITDA Margin %
Adj. EBITDA (Without Product Development Exp)

EBIT
EBIT Margin %

FY18E

Dep *

159

153

222

286

360

PBT *

142

(46)

214

462

817

Tax *

21

(11)

51

111

196

PAT *

67

(35)

162

351

621

1.3%

-0.7%

2.2%

3.8%

5.3%

3.0

(1.5)

7.2

15.6

27.5

PAT Margin %
EPS Rs
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 discount 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 discount 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 (Insurance business)
Sales (FY17E) (Rs mn)
Guidewire (EV/Sales) (x)
Discount to Guidewire Valuations %
Target (EV/Sales) (x)
Majesco EV (Rs mn)
Holding Discount %
EV (Rs mn)
Less:Debt (Rs mn)
Add:Cash (Rs mn)
Market Cap (Rs mn)
No of Shares (Rs mn)
Price per share (Rs)

Bear Case
8,409
6.7
80%
1.3
11,269
40%
6,761
189
395
6,967
22.5
309

Base Case
9,344
6.7
75%
1.7
15,651
35%
10,173
189
395
10,379
22.5
460

Bull Case
10,278
6.7
70%
2.0
20,659
30%
14,461
189
395
14,667
22.5
651

Source: Company, 10K filings, BP Equities Research

Institutional Research

BP Equities Pvt. Limited (www .bpw ealth.com)


BP Equities reports are also available on w ebsite www .bpw ealth.com

28-08-2015
2

B P W E A LT H

Majesco Ltd

Company Update

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 clients 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 employees) 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

Majesco US business structure

Source: Company, BP Equities Research

Institutional Research

BP Equities Pvt. Limited (www .bpw ealth.com)


BP Equities reports are also available on w ebsite www .bpw ealth.com

28-08-2015
3

B P W E A LT H

Majesco Ltd

Company Update

Highly rated Platform and well recognized industry player


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

Source: Company Presentation, BP Equities Research

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.
Majesco Operational Metrics (FY15)

Source: Company Presentation, BP Equities Research

Institutional Research

BP Equities Pvt. Limited (www .bpw ealth.com)


BP Equities reports are also available on w ebsite www .bpw ealth.com

28-08-2015
4

B P W E A LT H

Majesco Ltd

Company Update

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. Majesco 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 rearchitecture 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

2015
2013
2008

140+
Customers

80+
Customers

Nine out of the top 25


US P&C insurance
carriers are Majesco
customers

35+
Customers

2007
10+
Customers
2005
3
Customers

Source: Company Presentations, BP Equities Research

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%)


Market Opportunity

$7.9
$18.5

Addressable US Market Opportunity (50%)

$9.3

Source: Company Presentation, BP Equities Research

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.

Institutional Research

BP Equities Pvt. Limited (www .bpw ealth.com)


BP Equities reports are also available on w ebsite www .bpw ealth.com

28-08-2015
5

B P W E A LT H

Majesco Ltd

Company Update

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 withstand increased competition environment. There is immense need for these P&C insurance companies 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 & marketing expenses will dent margins going forward.

Institutional Research

BP Equities Pvt. Limited (www .bpw ealth.com)


BP Equities reports are also available on w ebsite www .bpw ealth.com

28-08-2015
6

BP
Research Desk

WEALTH

Tel: +91 22 61596406

Institutional Sales Desk

Tel: +91 22 61596403/04/05

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