Value creation gets real….
Mastek has announced the merger of Majesco with Cover-All (COVR), an NYSE listed core insurance systems and services provider. As part of the share swap deal, Majesco will be listed in the US while Cover-All shareholders’ (includes potential dilution) would hold 16.5% of outstanding shares of the combined entity. We believe the deal valuations could be construed as base value for Mastek’s insurance business even as incremental value could accrue, over time, with scale and synergy benefits. Assuming Mcap/sales deal multiple – itself at a 64% discount to comps – yields Rs. 723 crore value for the insurance piece, in-line with our Rs. 750 crore estimate, attributed in the September 18, 2014 note.
Raising fair price; thesis obligated by execution and earnings delivery…
We believe the insurance business post Agile acquisition and Cover-All merger could be a formidable player in the mid-market segment. Further, value creation in the insurance business is getting real with Majesco’s US listing. We believe the combined insurance business could be valued at 2.5x on Mcap/pro-forma sales metric (25% hold-co discount, 1.5-2x earlier) given deeper market expertise and cross-selling opportunities within the acquired clients while the services business could be valued at 3.5x trailing pro-forma EV/EBITDA. This translates to a fair value of Rs. 600.