Majesco Ltd
Buy
BP WEALTH
Stock Rating
BUY
HOLD
SELL
> 15%
-5% to 15%
< -5%
Sector Outlook
Stock
CMP (Rs)
306
460
BSE code
The US P&C insurance is a big market with Insurance IT spend for external software and services in
the range of US$ 44 bn (according to Novarica 2015 report). The total premium underwritten by top
US P&C insurers was in the range of ~US$ 1,259 bn. Generally insurance companies spend ~3-4% of
the premium on IT up-gradation which is ~US$44 bn. Out of this ~US$9 bn can migrate to third part
vendors like Majesco and Guidewire, etc. The addressable market for Majesco is primarily related to
billing, policy administration & claims, which is ~US$ 6-7 bn. At present only ~10-15% of the market is
penetrated and Majesco remains one of the top 3 vendors in US P&C Insurance market, thus there lies
immense opportunity. In insurance business ~83% is derived from US P&C Insurance (which is highly
underpenetrated) and ~13% from Life and Annuity (L&A) insurance. There is huge growth opportunities in the US P&C Insurance market and we believe this segment will drive growth going forward.
NSE Symbol
Positive
Bloomberg
Reuters
539289
MAJESCO
MJCO IN
NA
Key Data
Nifty
8,002
52WeekH/L(Rs)
363 / 289
22.5
Average volume
3 months
NA
6 months
NA
1 year
NA
Highly rated Majesco Insurance Platform - will lead to scaling up and margins improvement
Majesco has been rated by Gartner and has been among the top 3 vendors in the US P&C market.
Gartner has placed Majesco platform in the leaders quadrant and it is one of the few Indian product
companies to be highly rated by reputed analysts in the US and UK. Gartner, in its Market Scope report has rated Majesco in the promising column which shows the strength of the platform. Guidewire
which is a close competitor to Majesco in the North American P&C Insurance market comes in the
strong positive column. The Majesco platform has also received rating from various other reputed Relative Price Chart
agencies like Celent, Novarica. Majesco is a high gross margin and low net profit margin business because of high investment in R&D and Sales & Marketing. The business has huge potential for scaling
up and generate strong cash flows. Majesco now commands a gross margin of 41.2% (after acquisitions) and invests ~14% of sales in R&D. We expect the EBITDA margin to expand ~400 bps to ~6%
in FY16E.
Management optimisticlikely to clock revenue CAGR of 23% for FY15-18E
Management is optimistic about the growth prospects of the company has listed the goals for the next
three years. They expect the company revenues to reach ~US$ 200-225 mn in FY18E which results in
a revenue CAGR of 23% (taking the lower end) in FY15-18E. Further on the margins front the company expects EBIT margin to be in higher single digit (9-10%) from current loss at EBIT level. We believe there are significant margin levers available however this will depend of the top-line growth, because its a non linear business model and a high gross margin business. We expect the revue to Research Analyst
grow at a CAGR of ~20% for FY15-18E and EBIT margin to stand at ~ 6% in FY18E.
Amit Chandra
amitchandra@bpwealth.com
022-61596407/08
B P W E A LT H
Majesco Ltd
Company Update
Financial Highlights
FY14
FY15
FY16E
FY17E
84
82
115
148
187
-2.4%
41.2%
28.6%
26.0%
5,070
4,993
7,267
9,344
11,770
301
107
436
748
1,177
5.9%
2.1%
6.0%
8.0%
10.0%
875
743
1,308
1,869
2,589
17%
15%
18%
20%
22%
11%
13%
12%
12%
12%
142
(46)
214
462
817
2.8%
-0.9%
2.9%
4.9%
6.9%
EBIT
EBIT Margin %
FY18E
Dep *
159
153
222
286
360
PBT *
142
(46)
214
462
817
Tax *
21
(11)
51
111
196
PAT *
67
(35)
162
351
621
1.3%
-0.7%
2.2%
3.8%
5.3%
3.0
(1.5)
7.2
15.6
27.5
PAT Margin %
EPS Rs
Source: Company presentation, 10K filing, BP Equities Research
Bear Case
8,409
6.7
80%
1.3
11,269
40%
6,761
189
395
6,967
22.5
309
Base Case
9,344
6.7
75%
1.7
15,651
35%
10,173
189
395
10,379
22.5
460
Bull Case
10,278
6.7
70%
2.0
20,659
30%
14,461
189
395
14,667
22.5
651
Institutional Research
28-08-2015
2
B P W E A LT H
Majesco Ltd
Company Update
Institutional Research
28-08-2015
3
B P W E A LT H
Majesco Ltd
Company Update
The companys Insurance platforms is ranked 3rd in Policy (Domain:-P&C Core by Rating Agency
Gartner) and 1st in Billing (Domain:- Enterprise Solutions by Rating Agency Celent). The depicts the
strong domain knowledge and the company has been able to grow its customers from 30 in FY08 to
100 customers in FY15. We expect the company will leverage the strong domain knowledge to win
clients and penetrate more in US P&C market.
Majesco Operational Metrics (FY15)
Institutional Research
28-08-2015
4
B P W E A LT H
Majesco Ltd
Company Update
2015
2013
2008
140+
Customers
80+
Customers
35+
Customers
2007
10+
Customers
2005
3
Customers
Size US$ Bn
$1,259.0
IT Expense (% of Premium)
3.5%
US Annual IT Expense
$44.1
Staff (40%)
$17.6
$6.6
$6.6
$5.3
$7.9
$18.5
$9.3
The addressable market for Majesco is primarily related to billing, policy administration & claims, which
is ~US$ 9.3 bn market. At present only ~10-15% of the market is penetrated and Majesco remains is
one of the top 3 vendors in US P&C Insurance market, thus there lies immense opportunity.
Institutional Research
28-08-2015
5
B P W E A LT H
Majesco Ltd
Company Update
The core nature of the Insurance business is long termSticky Revenue Model
Insurance business is a large and vibrant marketplace that values long term partner relationships
based upon software quality, performance and delivery success. Once a customer moves to Majesco
platform, there is high probability that it will remain there for the next 10-15 years. The reason is that
the system becomes so core to client that the data migration and workflow changes necessary for the
move make it impossible for the client to do it more often. Thus the companys revenue visibility is
pretty robust (75% of revenue visibility on day one of the Fiscal). We believe that Majesco robust &
proven platform, solid & highly predictable business model provides revenue visibility.
Ageing P&C Insurance platforms needs a reboot
All leading US P&C Insurance players are running on old legacy systems, some of them are around 30
years old. The property and casualty (P&C) U.S insurance industry is primarily dependent upon in
house developed or third-party mainframe systems. These systems are old and is hurting the industry
due to 1) Inefficiency and inflexibility of existing P&C IT systems 2) ageing IT infrastructure 3) outdated
technology 4) increased importance of new payment methods and channels and 5) unable to withstand increased competition environment. There is immense need for these P&C insurance companies to adopt to newer technologies and shift work to third part software platforms. This provides them
efficiency result in cost saving, in some cases operating margin expansion is in the range if 2-3%.
Insurance Transformation Business Line Market Maturity
Key Concerns
Delay in ramp up of Majesco US
We have assumed that Majesco business is at a inflection point and going forward the company will
be able to scale up revenue growth. Any delay in ramp up will be a risk to our assumptions.
More than expected rise in product development cost
Product development and R&D is significant part for a product company. We have assumed the R&D
cost to remain at a constant level as a % of sales. Any unexpected ramp up in R&D and Sales & marketing expenses will dent margins going forward.
Institutional Research
28-08-2015
6
BP
Research Desk
WEALTH
Disclaimer Appendix
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