Daljeet Kohli & Amar Mourya have been following Mastek Ltd like bloodhounds. They first recommended a buy in January 2014 when the stock was at Rs. 180. In July 2014, though the price hadn’t moved much (Rs. 190), the duo reiterated their buy advice. They pointed out that Mastek has a “sticky” business model, meaning that once a customer moves over to the Mastek platform, he is likely to remain there for several years to come, and that it has a “solid and predictable” business model. They also hinted that Mastek is “the next Thinksoft Global Services Ltd and Accelya Kale Solutions Ltd in the making”.
Daljeet & Amar had also foreseen that there was a possibility of “value unlocking” by way of ‘Divestment/Listing of U.S. Insurance Business separately’.
Today, the vision of these ace stock pickers for Mastek came true because its board of directors approved the demerger of the Insurance Products & Services business of Mastek Ltd. into a new company to be named as Majesco Ltd. The Scheme further proposes transfer of the offshore insurance operations from Majesco Ltd to its step down subsidiary (to be called Majesco Software and Solutions India Pvt. Ltd – “MSS India”) (held through Majesco Mastek Insurance Software Solutions Inc).
In their latest report, Daljeet & Amar explain that this development is positive for investors because it unlocks the value of the insurance vertical, as it demands higher valuation relative to other segments (Government, Financial Services, & other Services). They also point out that the services business could also see P/E re-rating on account of higher net profit relative to the overall company level. They add that this development could also pave way for the individual entities to raise funds through various alternatives.
The duo further explain that Mastek is, at the CMP of about Rs.272, trading at a P/E multiple of 7.7x FY15E and 4.8x FY16E earnings estimate. This is very reasonable bearing in mind the fact that the corporate action will enhance the overall valuation of the company. The duo has recommended a buy with a target price of Rs.550/share, which is a whopping 100% gain from the CMP.