Buy Majesco; target of Rs 570: Anand Rathi

Anand Rathi's research report on Majesco

With $34m revenue, Majesco US (the underlying) had a steady Q2 (up 1.5% q/q, 12% y/y), as cloud-revenues (contributing 39% and growing 9% q/q, 41% y/y) displace traditional service revenues (down 3% q/q, 1% y/y). The transition hit the order book, at $73m (down 10% q/q, 5% y/y) leading to expectations of a slow H2. Majesco won its second deal through IBM, not yet in the order book, likely to benefit FY20. The EBITDA margin at 11%, up 272bps q/q, was driven by currency, higher offshore and SG&A discipline, and is likely to persist. We maintain our Buy, with a `570 target (`575 earlier) while moving to a PE-based valuation (from EV:Sales) reflecting profitability and scale.

Outlook

We lower our sales estimate ~5-6% on the continuing transition to the cloud, but raise our FY19/FY20 margin 66bps/219bps, adjusting for currency and the higher cloud sales. We introduce FY21e and move to a PE-based valuation to reflect its scale and profitability by then.