Ashish Kacholia Buys Into Daljeet Kohli’s “Safe” Stock With 200% + Gains Potential

There are some stocks that Daljeet Kohli knows like the back of his hand. He understands the nuances of these stocks and knows what makes them tick.

Majesco is one of them. Daljeet recommended a buy of Majesco in July 2014 when it was still in the womb of its mother, Mastek Limited. Daljeet predicted that the insurance division would be spun off and that there would be “value unlocking”.

Daljeet was proved right. Mastek was then available at Rs. 190. Today, less than 24 months later, the combination of Mastek and Majesco is worth Rs. 680 (Rs. 135 + Rs. 545) which means that we would be richer by 257% if we had acted on Daljeet’s advice.

Anyway, after surging to a high of Rs. 789 on 12th January 2016, Majesco has tumbled 30% to rest at the CMP of Rs. 545.

Daljeet claims that the correction is a golden opportunity for us to tuck into the stock. His logic is as follows:

(i) The basic rational to remain in Majesco is because it is doing all the right things which will lead to huge differential in valuation between its nearest peer which is Guidewire and itself. Right now Majesco is trading around 1.5 times of enterprise value (EV) to sales of FY18; FY18 is one time, FY17 it is 1.5 times or so whereas Guidewire trades at 8 times;

(ii) The difference is justified because Guidewire right now is USD 300 million Company while Majesco is at USD 100 million. However, in the next two years Majesco will also reach USD 250 million. We have seen in the last eight-ten years for Guidewire and other competitors that once they reach above USD 100 million, the EBITDA margins pops up and the company comes into huge profit, the net profit margin goes to 8-10 percent, EBITDA margin goes to around 20 percent. Right now this company’s EBITDA margin is 12 percent;

(iii) Majesco has been continuously hiring high quality sales and staff, they have been adding clients. For example earlier they had only 80-90 clients, now they have 150 clients. So there is a regular increase in the client numbers. They are continuously coming up in rankings; they are coming in top rankings. So all this is making us believe that these numbers are achievable and once these revenue and EBITDA numbers come in then this valuation of one time and eight times will narrow down;

(iv) So, in the next five years even if Majesco to three times, the stock will be around Rs 1,700. We have given two targets. One is Rs 899 on FY18 basis and on FY20 basis is around Rs 1,690.

It is worth noting that Daljeet’s target prices of Rs. 899 and 1,690 for FY18 and FY20 mean that there is a potential to harvest gains of 65% and 210% respectively from the stock.

Daljeet has also issued a detailed initiating coverage report in which all the nuances of Majesco have been explained. He has also issued a Q4FY16 update in which he has confidently asserted that “Transformation remains on track….”

The big endorsement of Daljeet’s theory has come from Ashish Kacholia, one of our favourite stock wizards. Ashish Kacholia has quietly scooped up a massive chunk of Majesco’s stock and holds 333,340 shares as of 31st March 2016. The investment is worth Rs. 18 crore at the CMP of Rs. 545.

Daljeet’s confidence for Majesco is shared by Dipen Sheth of HDFC Securities and Avinnash Gorakssakar of Precision Investment.

Dipen Sheth stated that Majesco has “tremendous addressable opportunity and non-linearity in that opportunity which means it requires lesser capital as it moves forward to grow and the revenues and the profits can be disproportionate as you move forward”.

Avinnash Gorakssakar recommended a buy on the basis that “the order book visibility is very strong and the potential going forward and the business upside for this segment is very huge”. He emphasized that it is a “1.26 trillion market for which Majesco is actually the addressable market of roughly about $9 billion.”

HDFC Securities and ICICI-Direct have also issued Q4FY16 update reports in which they have painted a rosy picture of Majesco’s future.

Majesco has also issued a “results presentation” where it is stated that there is a “Revenue growth target of $200 to $225 M with 12% to 14% EBITDA by 2017-18”.

Now, whether Majesco will be able to achieve these ambitious targets and enrich Ashish Kacholia and the other shareholders requires to be carefully watched!