Buy Majesco, target Rs 715: HDFC Securities

HDFC Securities has given a buy recommendation on Majesco with a target price of Rs 715.

Shares of Majesco traded at Rs 503 around 2:55 pm on 20 May, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

March quarter highlights:

• Revenue stood at $36.9 million, up 4.2 per cent QoQ, led by continued cloud traction (up 8.7 per cent QoQ, 44 per cent of revenue).
• Strong growth in cloud implementation (up 11.4 per cent QoQ, 32 per cent of revenue) is driven by Metlife deal which will go-live in Q2FY20. Successful implementation of MetLife deal is crucial as it will act as a reference for future wins.
• Cloud subscription, which is a high margin and annuity revenue stream, was up 47.5 per cent in FY19 (nearly 12 per cent to revenue). P&C/L&A revenue was up 5.4/2.1 per cent QoQ and contributed 68/31 per cent to revenue. For FY19, growth was fueled by L&A (up 51.4 per cent) while P&C was soft at 3.8 per cent.
• Ebitda margin contracted 354bps QoQ to 7.5 per cent due to one-time expenses. For FY19, margin expansion was healthy (up 662 bps) led by growth in cloud subscription. The 12-month executable order book was up 14 per cent YoY CC driven by cloud wins.
• Net Cash stands at Rs 389 crore against Rs 335 crore in FY18. The company is actively looking for an acquisition to strengthen its cloud offerings.

Investment rationale:

Huge shift has happened from on-premise to cloud model for the past two years. Cloud is now nearly 40 per cent of revenue and de-growth in legacy (nearly 20 per cent of rev) has started to stabilize, the brokerage said.

The MetLife cloud platform is in its last stages of implementation and will fetch minimum subscription revenue post go-live. Scaling of subscription revenue is the key for margin expansion, the brokerage added.

The partnership with Capgemini for L&A and Group life is a very positive development and can bring large deals on the table.

"We expect $revenue CAGR of 17 per cent over FY19-21E will be driven by cloud CAGR of 36 per cent and stable legacy. We maintain our positive stance on Majesco due to rising adoption of third-party software by insurers, IBM & Capgemini partnership, improving deal wins, and ramp-up in cloud revenues," the brokerage said.

However, slowdown in deal wins, increase in R&D and SG&A investments and global slowdown are the potential risks, the brokerage added.