A midcap opportunity? 7 reasons why Majesco is at an inflection point

Arun Mukherjee, Soumya Malani

Majesco is among the top 3 IT Insurance product companies in the US Property & Casualty (P&C) space. It also has a presence in the Life & Annuity space (L&A), mainly in the European regions.

It has the first mover advantage in the cloud space with the largest number of active clients (54 cloud clients as of March 2019). Its major peers are Guidewire and Duck Creek, among others. It has 215 customers as of March 2019, of which 54 are cloud customers.

Majesco India , which is a listed entity in India, operates predominantly through its 70 percent subsidiary Majesco US (listed on the Nasdaq). In addition, there is $2-3 million distribution management revenue in India wherein it caters to insurance companies in India.

Revenue mix:

Majesco derives 70 percent of its revenue from P&C, 29 percent from L&A and 1 percent from non-insurance services. In terms of geographies, 86 percent revenue comes from North America, 7 percent from Europe and balance from the rest of the world, mainly the Asia Pacific.

Segment wise, 38 percent of the revenue comes from professional services, 29 percent from cloud implementation, 12 percent from cloud subscription, 19 percent from support and maintenance and 3 percent from licensing fees (the last 3 segments being recurring in nature).

$60 billion opportunity size in the P&C and L&A space:

Changes in technology, the rising customer demand for a better experience, real-time digital engagement and reduced time to market is pushing insurance companies across the globe to upgrade or replace their legacy systems.

The Global P&C and L&A annual premium market put together is a $5 trillion market and typically insurers spend around 3 percent on IT. For Majesco, the addressable market is approximately $60 billion which includes $22 billion of services opportunity, $22 billion of maintenance and support and $15 billion of hardware and software.

With $220 million spent till date on R&D, Majesco is well poised to benefit from this huge opportunity size. It clocked revenue of $140 million in FY19, led by its leadership position, its strong product capabilities and first mover advantage in the cloud space.

The transition to cloud had impacted its revenue in the past though now things back to normal. The insurance industry is undergoing significant changes with increasing preference for cloud-based products as against on-premise, which is led by low upfront investment, improved time to market, flexibility, quicker up-gradation, and competitiveness.

This along with Majesco identifying this transition early and having a first mover advantage in the cloud, meant that its business model underwent significant changes, with a majority (80 percent +) of new deals coming from cloud.

However, unlike on-premise implementation, where the implementation revenue forms a significant proportion and is booked in the initial phase of the deal, cloud revenue is more spread out over the duration of the contract.

This, in turn, resulted in Majesco’s financials being impacted in FY18 and some part of FY19 when the share of on-premise revenue was declining faster while that of cloud was gradually going up.

Now this seems to have normalized as the company’s growth numbers have improved in the recent past (FY19 saw a dollar revenue growth of 14 percent).

Strategic Focus Areas:

Key focus areas for Majesco are: 1) P&C solutions (through up-sell, cross-sell, new customers) 2) L&A solutions (through up-sell, cross-sell, new customers) 3) Partnerships (likes of IBM and Capgemini which enable Majesco’s products to reach out to a significantly larger base of tier 1 clients) 4) M&A to enhance capabilities and/or reach (most recent being Exaxe, an Ireland based SaaS company having strong presence in the L&A space in Europe).

IBM Partnership:

IBM has everything on offer for the insurance industry except a core insurance platform. They are good at project management and sales. They needed a strong core solution, which improves customer stickiness, and which they can eventually offer on their cloud platform.

Majesco, with a strong decade-old relationship with IBM and a strong cloud-based platform offering both in life and P&C, fitted the bill here. They have already signed up one large client a few quarters back and many such opportunities are likely to come up in the future under this partnership.

A strengthening leadership team:

Majesco last year hired a new CEO –Adam Elster. Adam comes with a rich experience of more than 20 years in the technology space in the US – a large part of which has been spent with CA Technologies – a Fortune 500 company.

He has worked across sales, service, support, delivery and operations functions. Adam also brings in his strong sales expertise and experience, which has historically not been the strongest of areas for Majesco and should help the company in bridging the gap.

They have also recently hired the new CFO and Chief Revenue Officer, both of whom come with rich experience and domain expertise.

All these are steps in the right direction to strengthen the management bandwidth and take Majesco to the next level of growth.

Why clients choose Majesco?:

1) Speed to market. 2) A talented group of people who understand customers’ needs and hence can hit the ground running straight away. 3) A wide variety of service/product offerings to choose from. 4) A robust cloud platform with first mover advantage. 5) Majesco’s ability to look ahead and be ready with the offerings faster than most others.

Valuation:

Majesco is at the cusp of a strong growth period likely over the next few years led by industry tailwinds and its strong positioning within that. Majesco trades at 2x FY19 EV/sales and looks attractively priced.

(Arun Mukherjee and Soumya Malani, who hail from Kolkata, are partners in Equity Wealth, a SEBI-registered investment advisory firm. Arun, a college dropout by choice, entered the markets at age of 14. Soumya holds a Masters from London School of Economics and Political Science (LSE), and is a CA and CS.)