Mehul Bhatt OysterRock Capital | Outlook Business
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My Best Pick 2019

Mehul Bhatt
The poster boy of insurance technology, Majesco, is the pick of the year for the founder of OysterRock Capital

“Well what I’m saying here is that the human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so that the next one can’t get in” 

Charlie Munger

Taking stock names publicly is akin to what Munger states — fraught with risk that comes from a self-confirmation tendency and commitment bias. But successful investing is all about embarking on such treacherous journeys. OysterRock Capital’s focus is to find the “undiscounted change” in the marketplace. Majesco is one such company that could have that undiscounted change in the current environment. The company was spun off from Mastek as the latter split its business into two parts, that is, services and software. Majesco got spun off in 2015. Industry tailwinds, a strong product and an improving sales machine combined with an attractive valuation make the stock a decent investment. 

Majesco serves just one vertical — insurance; it develops insurance software, support and business consulting expertise and has a well-received cloud platform. It offers end-to-end implementation and support to clients unlike some of its competitors which use system integrators (SIs) and has a strong life and annuity (L&A) and property and casualty (P&C) practice. P&C is the largest segment for Majesco with revenue contribution of around 79% and its ‘Billing’ module is regarded as the top selling module globally. Globally, the company serves 150 clients across North America, Europe, Middle East and Asia. The company, whose key competitors include Guidewire, Duck Creek, and Insurity, is trying to ‘productise’ its service, and is transitioning to become a product company. 

Importantly, the company has multiple growth drivers in place. 

Majestic Positioning

Global insurers are embarking on business transformation programs as core IT systems are archaic and are causing regulatory, operational and experiential challenges. The current global market has around 11,000 insurers with $4.5 trillion annual premium collections, of which around 2.5% is invested in technology. The addressable market for Majesco is around $25 billion with property and casualty accounting for 55% of the market with 2,700 players operating only in the US. Life and annuity makes up for 45% of the industry with IT companies offering services across billing, policy administration and claims processing

Thus far, the insurance industry has been plagued by low investments in technology, mostly done in-house with little or no refresh. Outsourced component is a mere 15%. Regulation is serving as a key catalyst for the industry to improve its IT systems, especially for compliance and new products. What the insurance industry seeks from tech providers is new functionalities – digital, mobile, analytics, and cloud, which the legacy systems don’t support. Industry players also desire better speed to market, customer experience, newer channels, reduced total cost of ownership and the ability to launch new products.

Majesco possesses the entire product suite and services along with cloud offering, big data and analytics, with a pay per use model, in other words, recurring revenue. The company has strengthened its product through several inorganic initiatives, including the acquisition of Systems Task Group (P&C solution) in 2008, SEG Software (policy administration system for life & annuities covering individual and group capabilities) in 2010 and Coverall (commercial lines - policy, business intelligence and claims specialist) in 2014. Gartner recognises Majesco, despite its small size, among the top three players in insurance-related IT products, platform and services space alongside Duck Creek and Guidewire. While both Guidewire and Duck Creek are large, formidable and pure-play product companies, Majesco could be the low cost product and implementation partner, especially for mid- and small-sized insurance players in the west. 

Win-win deal 

Majesco’s cloud-based product suite got a major fillip following its alliance with IBM. Under this partnership, Majesco is the default core solution on IBM’s insurance platform, which it would market to large prospective clients. Post the alliance, Majesco has invested extensively to build integration tools that could leverage IBM’s cloud infrastructure and Watson’s cognitive capabilities to build several business use cases for the industry using predictive analytics.

Majesco announced its first deal on the IBM platform in mid-2017 as it signed a 10-year cloud subscription with MetLife for a potential deal value of over $35 million under the life and annuities segment. This suite is currently being implemented at MetLife. Once operationalised, it will help company establish proof of concept for scaling the business. The five-year partnership with IBM will take Majesco to newer geographies and clients. Currently, 89 of the top 100 insurers use IBM technology services to run their businesses. In effect, Majesco will have a growing pipeline of opportunities, including those from Tier-I customers.

Hidden Potential

The Majesco stock is currently trading at 2x its FY18 EV/revenue, whereas its peers such as Guidewire trade at around 10x its CY18 EV/revenue, a valuation measure that compares the enterprise value (EV) of a company to its annual sales. Given that the product platform requires upfront investments, P/E multiples don’t reflect the true value created in the business. 

As in any product business, Majesco has made most of the investment upfront and additionally spends about $20 million on R&D per annum. Majesco India earns $1.3 million in annual lease rental from Majesco US. Its property could be valued at $20 million. As soon as the company crosses the $150-200 million revenue threshold, EBIT margins will move disproportionately higher owing to operating leverage. A similar story was seen with Guidewire over 2007 to 2010. 

Majesco’s promoters were early entrants in the IT space in India but lagged larger peers. Owing to succession issues and challenges related to operating businesses, the current management could exit the business for an attractive valuation which will benefit all minority shareholders. In fact, improving board membership with past deal makers and a new CEO appointment point in this direction.

The key risks for the company could emerge if the product suite does not keep up with client requirements; or if the IBM partnership begins to stutter and does not scale and also from an irrational rise in competitive intensity. Majesco, coming from a service mindset, will find the transitioning into a ‘product’ mindset challenging. Also, a new CEO from the insurance industry could cause a cultural clash, which may hinder the value unlocking process. But, on balance, the risk-reward seems favourable at current valuation. 

With a better focus on ‘productising,’ the offering, healthy growth in cloud services and gradually improving client acceptance, Majesco stands to gain in the coming years. The current valuation, hence, does not reflect the potential catalyst in the form of either large contract wins or of a merger and acquisition.

OysterRock Capital and/or its associates do not take any responsibility for any errors or omissions in such information. The article does not constitute an offer or invitation to sell, or any solicitation of an offer or invitation to purchase or subscribe for any units in any jurisdiction. We own shares of Majesco in our fund’s portfolio and may buy or sell in future and to that extent we could be considered as interested

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