Acquisitions, diversification to lead FY16 growth: Mastek

Mastek is looking to acquire small businesses sub-10 million. Recently, it took over IndigoBlue, a programming management firm.

The company already has a presence in UK and plans to enter the US through acquisition in the next 18 months, Ram said, adding that Majesco will be listed in US by end of this month and in India by early August.

Below is the transcript of Sudhakar Ram’s interview with Ekta Batra and Anuj Singhal on CNBC-TV18.

Ekta: What is life without the insurance business now for Mastek? Can you tell us what FY16 is going to look like in terms of growth and margins?

A: The whole purpose of demerging the two operations was to give better focus to each part of the business because insurance had a very definite market potential and we felt that we needed to invest there to get the kind of growth that is feasible there. In terms of solutions, we were always very profitable and cash-rich. We wanted to re-invest because in the past four to five years most of our surplus from solutions has gone into investing in product development in insurance. Now, that that is off and these are two separate companies, each with a healthy balance sheet, the focus for solutions is to grow the business especially in government. The main work that we do is large transformation programmes. So, digital transformation is the focus of the company.

We are very good at doing transformation and big, complex programmes, which is what we have done over a period of 20 years now. We want to put that strength together, not just for government programmes, which is the main stay of our business, but also for other sectors like financial services and retail, which are all going through a channel shift which are going through a digital transformation. So, what would it take for these companies to be competitive to actually face the onslaught of other digitally savvy competitors. That is the main focus.

Mastek part of the business will grow at about industry on an organic basis. We have made some acquisitions also. Last month, we announced acquisition of IndigoBlue which is a high end programme management consulting outfit focused on Agile. Trend today is to do Agile development and we think that fits very well with Mastek’s co-competence. We should continue to see good growth in Mastek and higher profits as we go forward.

Anuj: Two parts question then - any more acquisitions that you have planned and secondly, critics would say that for pure services business, your margins may well have peaked. There may not be too much upside in the Mastek stock.

A: There are more acquisitions in the pipeline because we do have a healthy balance sheet. The second Mastek margins in the past have been depressed. We are still at double digit earnings before interest, taxes, depreciation and amortization (EBITDA) margins and we think it can grow to a high double digit EBITDA margin over the next three years.

That kind of room for improvement, which is quite significant given that if you are growing at let us say 15-20 percent and margins are also expanding, is quite a bit of upside which is possible in the next two to three years.

Anuj: You did say that you have some more acquisitions on the anvil. What kind of size are you looking at in terms of acquisitions?

A: Right now we are looking at small tuck-in type acquisitions, which are sub-10 million.

Ekta: What will your cash in books be?

A: I think about Rs 100-120 crore of cash. But we will generate enough cash every year. At least, Rs 40-50 crore of cash every year.

Ekta: Geographically, how are your clients doing? Predominantly, your clients are from the UK. Any more client wins or what will the trajectory might be in FY16?

A: In UK, the main focus, 65 percent of our business comes directly or indirectly through the government and the government has been wanting to spend more through platforms like the G Cloud, which favours small and medium software providers. That part of the business did slow down during the UK elections, because they have a close period during that time and we were all worried that there may be a hung parliament. Fortunately, the Tories got a good majority in the UK.

Whatever was the strategy in the last four or five years will be continuing. The programmes that we have done well in terms of home office that we talked about in terms of the health and social care information centre (HSCIC), will continue to develop and grow. We will be adding more departments. But, from that we have had a fair amount of success in adding new retail customers that we have added about three new customers in the last quarter. And financial services especially in the personal lending sub-prime lending is another focus for us which we think will grow over a period of time.

Ekta: Will this business model in particular continue for Mastek? For example, your predominant focus in the UK, your predominant focus in service solutions or will there be any diversification inorganically that you are mulling?

A: We did make selective investments. Last year, we made an investment in something called Legal Process Technologies which was a joint venture with the Law Society in the UK where together we have built a conveyancing portal. It is about idea of doing real estate transactions when you buy or sell houses. That entire process is completely manual with hardly any visibility. So, we have now created a portal and we did a soft launch of that just last month with very good reception. It is called Veyo. That is one area where we think that the kind of strengths we have can get converted to a software as a service (SaaS) model or a utility model, but there will be more such opportunities as we go forward. We are also looking at going back into the US over the next 18 months maybe through an acquisition because Mastek today is largely UK focused. So, we also need to diversify.

Anuj: So, let me go back to my original question and then a word on the margins. You did say there is a lot of competition in this space. What makes you so confident that you will be able to improve your margins from lower double digits to high double digits?

A: I did not say there was a lot of competition in this space because the nature of work that we do which is high end transformation programmes. Very few companies in the world do that. Even on the UK government, we have done large programmes in the past like the NHS, the Spime which is actually the electronic health record for all UK citizens or the congestion charging.

Very few companies in the world actually focus on high end, because a lot of people are into a standards services model which is largely industrialised where you can scale much easier. These kinds of things require high innovation component; they require consulting inputs. So, it is not really a scalable model from that perspective because it is like research and development (R&D).

So, we are one of the few companies in the word who does this. It is niche and now that a lot of companies are looking at how do we transform, how do they transform to a digital world, they need this kind of expertise. So, it is not a very competitive business for us.

Ekta: Your operating revenue was Rs 513 crore in the year gone by; it was at 23 percent growth. Can you better it this year?

A: 23 percent was a very high growth. Last year was exceptional, but we are looking at a 15-20 percent kind of range including our inorganic acquisitions that we have.

Ekta: The other thing is obviously the insurance business. Just because it is in news and we had the shareholder approval on the cover-all merger that came in yesterday itself, what is the status there? When can we expect Majesco to list in the US and subsequently in India?

A: The whole game plan there was to list in the US and to list in India. The substantial part of the insurance value chain will be controlled out of Majesco in the US and now that the cover-all shareholders have approved the merger, it is just a procedural thing. In the next week or 10 days, we should be listing in the US. Hopefully, next week by end of the month, we should have the US listing.

There are still some procedural issues that we need to go through in India and it will take another month and a half. We expect that sometime by late July, early August Majesco Limited in India should list.