Majesco Initiating Coverage Research Report By Reliance Securities

Majesco Limited – the hived-off insurance product unit of Mastek, listed on stock exchanges on August 19, 2015 – offers core insurance technology software and services to insurers, mainly in the US. It has developed highly-rated insurance products for US P&C insurance market. We believe Majesco will be a key beneficiary of untapped US P&C core software market (10-15% 3rd party penetration), led by highly-rated product portfolio, focus on Cloud, expanding strategic tie-ups and cross-selling opportunities with extant clients. We initiate coverage on Majesco with a BUY recommendation and Target Price of Rs678, which implies a substantial 34% upside from the CMP.

Stock Correction Offers an Opportunity; Fund-raising could be a Catalyst Following a steep stock price decline of ~33% in last 7.5 months, Majesco trades at an EV/revenue multiple of just 1.0x FY18E revenue, at a sizable 86% discount to listed peer Guidewire. We believe this decline is an opportunity for long-term investors considering the low revenue multiple, lowered street expectations, downside protection and huge untapped opportunity. Its Board of Directors has approved a proposal to raise up to Rs2.5bn through QIP, the proceeds of which, in our view, will be used to acquire US P&C firms to boost capabilities and scale, which could be a key trigger for stock price.

Under-penetrated & Huge Business Opportunity with Highly-rated Products Majesco’s total addressable market stands at ~US$25bn out of which the addressable market size for US P&C market stands at US$9.25bn. With just 10-15% serviced by thirdparty vendors, the market remains highly under-penetrated. Celent & Gartner have rated Majesco’s suite of products for US P&C insurance market amongst the Top-3, which we believe will drive greater client acceptance in the key US market.

Cloud Offering – A Potential Trump Card; Major Cross-selling Opportunity As per SMA Research, 48% of insurers are increasing investments in Cloud. Majesco’s Cloud offering has Big Data, Analytics & BI capabilities, which we believe will be a key differentiator which will stand it in good stead to win deals and more business from Tier-I insurers. Currently, on its Cloud product, Majesco counts only 30 of 164 clients and gets ~18% of revenue, which offers a huge cross-selling opportunity for the company.

Valuation On the valuation front, major peer Guidewire Software (Guidewire) trades at an EV/revenue multiple of 7.3x FY18E revenue. We value Majesco taking a 72% discount to Guidewire valuations and 30% holding company discount. We assign an EV/revenue multiple of 2x to Majesco’s FY18E revenue of Rs11.6bn; thus calculated EV works out to Rs23.2bn. Adjusting holding company discount, EV comes to Rs16.3bn. Accounting for net cash, we arrive at Rs18.9bn equity value for Majesco (including QIP proceeds, assumed dilution at Rs500), which works out to a Target Price of Rs678/share (including diluted shares from the QIP), implying a substantial 34% upside from the CMP.