Please Share:: 
Windfall gains at last!
Mastek has announced the restructuring of its insurance business into a
separate entity to better leverage existing IP capabilities and capital
allocation strategies. The sub-optimal performance of the company was
driven by disproportionate capital allocation (product development
expenses of | 57 crore in FY14 vs. PAT of | 52 crore) to insurance
practice (55% of revenues). Further, these investments were generally
penalised given the large gestation period and led to Mastek being valued
at a significant discount to pure-play IT services despite intrinsic value in
the products business. The restructuring, we believe, has the potential to
create substantial shareholder value while investor exposure could mirror
individual risk-reward appetite. Our comparable analysis suggests | 350-
400/share value for the insurance piece while | 110-150/share could be
attributed to the services business.
What could the fair value be?
Mastek’s current market capitalisation of ~| 700 crore is reflective of two
businesses. IT services and solutions, which generates revenue of | 416
and 14.4% EBITDA margins (FY14), and products business (generates
| 507 crore of revenues and 5.9% margins). On a combined basis, the
business is valued at a meagre trailing price/sales multiple of 0.8x.
However, were we to value the businesses separately, the insurance
business could be valued at | 750-900 crore, 1.5-1.8x Mcap/trailing sales
metric – 60% discount to global peer group average and 20% discount, at
the higher band, to the lowest multiple considering mediocre margin and
RoCE profile and domestic listing – while services business could be
valued at ~| 250-300 crore, 4-5x EV/trailing EBITDA metric – 16-33%
discount to global peer group average. Together, the analysis yields a fair
value of | 450-550/share, an average upside of 60% relative to current
market price. Please refer exhibits 1, 2 for detailed comparable comps.
Transaction details…
Mastek, in its annual general meeting, announced the demerger of
insurance products and solutions business (55% of revenues, 5.9%
EBITDA margins and 17.3% on adjusted basis, i.e. excluding product
development expenses) into a separate entity (to be renamed Majesco
Ltd). The company also plans to transfer the offshore insurance
operations from Majesco Ltd to its step down subsidiary, to be called
Majesco Software and Solutions India Pvt Ltd - “MSS India”, and held
through Majesco Mastek Insurance Software Solutions Inc. Existing
shareholders of Mastek would receive Majesco shares in the 1:1 ratio.
The shareholding post demerger would mirror the current shareholding.
The proposed structure involves two divisions, Majesco (insurance) and
Mastek (IT solutions business). Majesco will hold 83.5% stake in Majesco
Mastek (MM) US while the balance 16.5% will be held through Majesco
UK. A detailed pictorial representation is given in exhibit 3.
Change in valuation methodology leads to target price revision
We are transferring Mastek to our Nano Nivesh universe to comply with
our market capitalisation mandate. Though we adjust our estimates for
lower other income and await regulatory approvals, we are changing our
valuation methodology from P/E to sum-of-the-parts. We believe the
insurance business could be valued at 1.5-1.8x trailing pro-forma sales
metric while the services business could be valued at 4-5x trailing proforma
EV/EBITDA. This translates to a fair value of | 450 - 500 vs. our
earlier target price of | 220. However, investors are cautioned that the fair
value thesis is obligated to execution and earnings delivery.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
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Windfall gains at last!
Mastek has announced the restructuring of its insurance business into a
separate entity to better leverage existing IP capabilities and capital
allocation strategies. The sub-optimal performance of the company was
driven by disproportionate capital allocation (product development
expenses of | 57 crore in FY14 vs. PAT of | 52 crore) to insurance
practice (55% of revenues). Further, these investments were generally
penalised given the large gestation period and led to Mastek being valued
at a significant discount to pure-play IT services despite intrinsic value in
the products business. The restructuring, we believe, has the potential to
create substantial shareholder value while investor exposure could mirror
individual risk-reward appetite. Our comparable analysis suggests | 350-
400/share value for the insurance piece while | 110-150/share could be
attributed to the services business.
What could the fair value be?
Mastek’s current market capitalisation of ~| 700 crore is reflective of two
businesses. IT services and solutions, which generates revenue of | 416
and 14.4% EBITDA margins (FY14), and products business (generates
| 507 crore of revenues and 5.9% margins). On a combined basis, the
business is valued at a meagre trailing price/sales multiple of 0.8x.
However, were we to value the businesses separately, the insurance
business could be valued at | 750-900 crore, 1.5-1.8x Mcap/trailing sales
metric – 60% discount to global peer group average and 20% discount, at
the higher band, to the lowest multiple considering mediocre margin and
RoCE profile and domestic listing – while services business could be
valued at ~| 250-300 crore, 4-5x EV/trailing EBITDA metric – 16-33%
discount to global peer group average. Together, the analysis yields a fair
value of | 450-550/share, an average upside of 60% relative to current
market price. Please refer exhibits 1, 2 for detailed comparable comps.
Transaction details…
Mastek, in its annual general meeting, announced the demerger of
insurance products and solutions business (55% of revenues, 5.9%
EBITDA margins and 17.3% on adjusted basis, i.e. excluding product
development expenses) into a separate entity (to be renamed Majesco
Ltd). The company also plans to transfer the offshore insurance
operations from Majesco Ltd to its step down subsidiary, to be called
Majesco Software and Solutions India Pvt Ltd - “MSS India”, and held
through Majesco Mastek Insurance Software Solutions Inc. Existing
shareholders of Mastek would receive Majesco shares in the 1:1 ratio.
The shareholding post demerger would mirror the current shareholding.
The proposed structure involves two divisions, Majesco (insurance) and
Mastek (IT solutions business). Majesco will hold 83.5% stake in Majesco
Mastek (MM) US while the balance 16.5% will be held through Majesco
UK. A detailed pictorial representation is given in exhibit 3.
Change in valuation methodology leads to target price revision
We are transferring Mastek to our Nano Nivesh universe to comply with
our market capitalisation mandate. Though we adjust our estimates for
lower other income and await regulatory approvals, we are changing our
valuation methodology from P/E to sum-of-the-parts. We believe the
insurance business could be valued at 1.5-1.8x trailing pro-forma sales
metric while the services business could be valued at 4-5x trailing proforma
EV/EBITDA. This translates to a fair value of | 450 - 500 vs. our
earlier target price of | 220. However, investors are cautioned that the fair
value thesis is obligated to execution and earnings delivery.
�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��
��
LINK
http://content.icicidirect.com/mailimages/IDirect_Mastek_CoUpdate_Sept14.pdf
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