BP Equities' report on Mastek
Mastek Ltd was incorporated in 1982 by four friends and technocrats Ashank Desai, Ketan Mehta, R. Sundar and Sudhakar Ram and was one of the first software companies in India. Mastek has made significant investments in creating intellectual property, created niche for itself by venturing into solutions and platform based services, which along with proven methodologies and processes provided strong competitive advantages to its customers. Mastek primarily focuses into four business vertices, Insurance, UK Govt., IT & other services (Retail) and Banking financial services. The company currently has around 3000 employees and has offshore delivery facility based out of Mumbai. It operates across North America, Europe, and Asia Pacific regions.
In view of demerger of Insurance and services business, listing of Majesco in US, increased management focus on developing non-linear IP-led insurance business, re-rating of IT services and Insurance business, revenue growth in place for Majesco along with improvement in margins, we remain positive on the future prospects of the company. We have valued the company on sum of parts valuation methodology, which be believe is the best way considering the widely different characteristics of the two business.
The services business generates a EBITDA margin of ~12% and a PAT margin of ~6%, which is better than the Majesco business but is more commoditized in nature. With the demerger the management focus on services business will increase and will bring value to the existing shareholders. We expect that the services business will be re-rated as it will start generating higher RoE. We have assigned the Mastek IT services business a P/E multiple of 9x (in line with IT services midcap valuation) to FY17E earnings of Rs 19.6 and arrived at a target price Rs 174.
Majesco has ~150 active clients as compared to ~183 for Guidewire. In terms of valuation Guidewire trades a EV/Sales of ~7x FY17E. We have valued Majesco taking 80% discount to Guidewire valuations and have taken a holding company discount of 35% (average holding company discount is ~30%). We have assigned a EV/Sales of 1.4x to Majesco FY17E Sales of Rs 9.0 bn to arrive at a EV of Rs 12.7 bn. Taking the holding company discount the EV comes in at Rs 8.2 mn. The Majesco valuation comes in at Rs 390/share. The total value of Mastek Ltd on SOTP basis comes in at Rs 564/ share. In the bull case we have assumed higher multiple for the IT services business with improvement in top line and margins, for the Majesco business we have assumed the valuation gap with Guidewire to narrow with US listing, big deals wins and higher top line growth in FY17E. The bull case target price come in at Rs 708 upside of 70% from CMP. We initiate the company with a BUY rating and a target price of Rs 564 (upside of 35% from CMP). The stock currently trades at a P/E and EV/ EBITDA of 13.3x and 7.3x FY16E earnings", says BP Equities research report.
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