While China ran away with Manufacturing, India has been the hotbed of Service Industry. Tata Consultancy (TCS), Infy and Wipro are the names that come up when one speaks about Indian Infotech companies, from IBM to Capgemini, the catalyst for India’s job generation over the last decade has been this sector.
The Industry is dominated by firms which are able to service firms in the West thanks to cheap cost of labour in India. When it comes to products, the domination is by the Microsoft’s and Oracle’s of the world remains undisputed.
Software as a Service is a fast growing segment of the Industry and one that will start to unravel the models of the past. Infosys calls it the “Digital Future of the Software Industry”. Changing business models and the advantage of lower cost of maintenance means that pay per use model will gain more traction in the years to come.
The Company:
In 2015, Mastek split itself into two companies which resulted in the listing of Majesco on the Indian bourses. Just before the demerger of the Indian Operations, Mastek had listed the subsidiary of Majesco in US post the merger with Cover-All which was acquired by MastekMajesco as Majesco Inc was then known.
Majesco is a company that is operating in SAAS and PAAS (Product as a Service) with focus on Insurance vertical. The company is a core insurance software provider with consulting services and other insurance technology solutions to enable business transformation for the insurance industry.
While we have a few large companies that are co-listed on the US Stock exchanges, the unique feature of Majesco is that it has listed its subsidiary in US. Majesco India holds 70% of the US listed firm. (NASDAQ: MJCO)
Cloud – Future Proof
In the time before arrival of the Internet, companies invested into infrastructure that was required to store, retrieve and access data. Much of India’s top companies generate their maximum revenue maintain and updating these legacy systems.
Thanks to high speed internet and falling cost of infrastructure, Cloud is now a viable option that not saves time and money. It’s a Win-Win deal both for the end user as well as the service provider. Majesco in 2016 tied up with IBM to jointly offer a new cognitive, cloud-based platform to help insurance carriers worldwide create new services on IBM Cloud.
The first major deal struck post the arrangement was with Metlife. Majesco as of 4th Quarter 2019 has 40% of their customers run on Majesco CloudInsurer Platform.
Why invest in Majesco now?
Since its listing in 2015, the stock price of Majesco has barely moved much. From its all time high set in 2016, the stock today trades 35% below those levels. On the business side though, things have improved dramatically for the company.
We believe that the phase of the company when it was investing into products is basically over and the rewards of those investments should start flowing out.
Structure:
Majesco India, the listed company is a quasi-holding company and accounts for less than 10% of its global revenues. 80% of the revenue is generated by its US based subsidiary and its step subsidiaries.
The Group:
Majesco USA
Majesco (UK) Ltd
Majesco Software and Solutions India Private Limited
Majesco Sdn. Bhd.
Majesco Asia Pacific Pte Ltd.
Majesco Software and Solutions Inc.
Majesco Canada Ltd.
Exaxe Holdings Limited
Exaxe Limited
Concerns
Majesco is a small player in an Industry dominated by Goliaths. The differential is more in terms of the kind of business it’s in and the growth possibility therein.
Small stocks are also risky because of accounting issues that may not be visible easily. But the biggest advantage here is the fact that it’s subsidiary which accounts for majority of the revenue is listed on US Markets which have require companies to comply at a much higher level.
Financials:
Since the demerger took place in June of 2015, we have only 4 full year returns to work with.
Profit & Loss Account
The top-line growth in Revenue over the last few years has been nothing to speak about as the company has been trying to establish itself in the arena. What has changed significantly though is the bottom line with Profit after Tax shooting up substantially in the just completed year ending March 2019. Growth has been driven by way of acquisitions. In November 2018, the company’s US Subsidiary acquired 90% of Exaxe Holdings which is a SaaS business company for Rs.51 Crores.
Balance Sheet growth has not come with any major dilution of shareholder equity.
Cash Flows
Cash Flow Statement for the year ending March 2019 isn’t available as on date.
Shareholding Pattern:
The promoters of Mastek are the promoters in this company as well and hold around 39.50% stake. Among public shareholders, Mutual Funds, FII’s and Institutions together hold around 17.50%. Small public shareholders hold around 20%.
Noted Investor, Ashish Kacholia holds nearly 3% stake while among FII’s, Singapore based Amansa Holdings has a 4.8% stake.
Valuation
The Interesting thing about Majesco is that while the US business and other subsidiaries contribute 80% of the revenues of the Indian listed firm, the US company in itself is valued at 2300 Crores of which Majesco holding is valued at 1650 crores. Majesco India’s market cap is at 1500 Crores.
Details of the Subsidiary:
The US Subsidiary of Majesco also called Majesco is listed on Nasdaq. The stock commands a market cap of $295M.
Revenue & Earnings per Share
Stock Chart of the US Subsidiary
Our View:
Majesco is a small company but one which is going down a different route and one where success is tougher but way more pleasant if it succeeds. Very few small companies are able to grow big with domain expertise in an single area. The most likely outcome for good companies is a takeover by a larger firm.
A good example of a similar event would be the takeover of I-Flex by Oracle. Well before the takeover, i-flex applications had been optimised for Oracle’s technology platform with over 90 per cent of i-flex customers running Oracle technology. In case of Majesco, IBM comes to mind as a prospective buyer, if they grow large enough.
Even without such a buy-out, if the company can continue to grow, the valuation at the current price offer a good opportunity with limited downside risk.
Do note that the risk of small cap investing is higher versus large cap stocks.
Price History:
The stock since its listing hasn’t generated any return for the long term shareholder. With changes on the anvil and one that is being reflected in the numbers, one hopes the future is better than the past.
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