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Published on 7/12/2018 9:46:57 AM | Source: Emkay Global Financial Services Ltd

Buy Majesco Ltd For Target Rs.700.00 - Emkay

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Positive outlook from new CEO reinforces our bullish stance

*  Majesco reported in-line revenue growth numbers (1.1/5.7% qoq growth in USD/INR terms). Strong qoq/yoy improvement of ~300/1100 bps in margins at 9.5% and one-time gain related to liability reversal (~Rs0.06bn) led to strong 66/80% qoq/yoy growth in PAT.

*  New CEO, Adam Elster, who was responsible for global sales for US-based CA Technologies (US$4.2bn in revenues in FY18) in his previous role, indicated need-based investments in Delivery/Sales/Marketing. Near-term investments were hinted to drift toward improving visibility of Majesco’s industry leading/matching product range.

*  While the 12-month executable order book declined ~4.3% qoq to USD75.4mn in Q2FY19, it highlighted 1) winning of large deal with a Tier-1 P&C insurer, and 2) hopeful conversion of a large deal in the L&A space (POC stage), both under the IBM channel.

*  Cloud subscription revenues (up ~35% qoq; ~39% of sales) continued its growth momentum in Q2FY19. Maintain Buy with a DCF-based target price of Rs700.


New CEO: Product range in line/better than industry but less visible

Highlighting Majesco’s line of products to be similar/better than other available products (placed in the same Gartner quadrant with the likes of Duckcreek/Guidewire), the new CEO indicated to dwell upon the good work done by previous management and hinted only needbased investments to go into building capabilities/sales/marketing going ahead. Near-term investments were hinted to go toward improving the visibility of existing products. Cloud subscriptions (~39% of sales) continued its growth momentum (up ~35/58% qoq/yoy in INR terms in Q2FY19). 12-month executable order at USD75.4mn (vs. USD83.4/92.6mn in Q1FY19/Q4FY18) backlog saw a qoq decline, CEO highlighted 1) winning of a large deal in the P&C space, and 2) hopeful conversion of a large deal in the L&A space, both under IBM channel. H1FY19 EBIT margins at 8.1% are up ~750bps over FY18 margins on improved revenue growth (INR revenues are up ~24% in H1FY19), operational efficiencies, and INR depreciation (INR/USD up ~6% in H1FY19). 


Sustained growth in cloud business to continue to drive momentum

With sustained revenue traction in the cloud business, indications of an improvement in executable order book with large deal wins and healthy pipeline (six large deals in pipeline) and increased efforts to improve product visibility, we feel comfortable with our existing view of sustained financial performance, both in terms of revenue and margin performance. We expect revenue CAGR of ~14% and OPM gains of ~800bps over FY18-21, and maintain our Buy rating on the stock with a DCF-based TP of Rs700


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