Majesco Research Report By Anand Rathi

While Q1 was steady and revenue growth, order backlog and operating parameters were flattish, the highlights were greater profitability and cash generation. Majesco increased its investments last year and is looking to build profitability this year, supported by revenue growth. It had a setback in terms of one client ramping down in Q2, but looks to offset these pressures with growth in other areas and a strong H2.

Revenue at $32.9m, up 0.2% qoq, 39% yoy. The company had a slow start to the year with order backlog shrinking to $64.3m, down 12% qoq and sliding to Q1 FY16 levels and representing 45% of the next twelve-month revenues. Organic growth was ~12% in dollars. Majesco saw a steep decline in its licence revenues (down 45% qoq, 56% yoy) which it expects to recoup in H2, adjusted for cloud.

EBITDA margin 3.5%, up 226bps qoq, down 221bps yoy. Majesco experienced greater profitability with the EBITDA margin at 3.5% (1.2% in Q4 FY16). The gross margin improved 66bps qoq but declined 242bps yoy. SG&A was steady at 32% and the rest of the margin expansion came from lower R&D expenses. Net profit stood at `14.6m, compared to a `20m loss in Q4 FY16.

Business outlook. Majesco expects Q2 FY17 to be soft as a particular large client has ramped down (project delayed), but expects to recover from this decline with growth in other parts of the business. It expects H2 to be strong, a trend observed in FY16 as well. In Q1 FY17 it had 164 clients.

Cash generation strong. Majesco had a cash balance of `2,058m, and debt of `1382m, generating net cash of `323m. This was driven by receivable days returning to normal (49) after an high Q4 (73 days) and higher EBITDA of `77m.

Valuation. We value the stock at 1.7x EV:FY18 sales (the US entity is valued at 2.5x EV: sales) and 36x FY18e PE, applying no holding company discount. Risk. Vigorous M&A strategy and potential dilution.