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Initiating Coverage | Mastek Ltd. (Mastek) | Old Legacy Systems Create 'Fast-Twitch' Opportunity: Maintain BUY




IndiaNivesh Securities Pvt Ltd


06 Jan 2014





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Initiating Coverage | Mastek Ltd. (Mastek) Old Legacy Systems Create 'Fast-Twitch' Opportunity: Maintain BUY CMP: Rs.160 | Rating: BUY | Target: Rs.193 Mastek Ltd (Mastek’s) presence in modern web-based “fast-twitch” property & casualty (P&C) and life & annuity (L&A) insurance industry platform remains key growth driver. Globally large number of insurers use 30+ year old platform, which become hurdle for growth in changing industry environment. Hence, Mastek product have huge penetration, cross-selling and upscale opportunity. Additionally, improving economic conditions in UK should bode well on its government segment growth. We initiate BUY on Mastek Ltd with target price of Rs.193. Investment Rationale Large underpenetrated market: Out of ~$15 bn annual spends, we believe that as much as $6-7 billion of that could migrate over to third-party modern insurance software and services and vendor. Right now only less than 10% of that opportunity has been penetrated. High client acceptance: The Company’s platform is used by over 80 customers; we believe it brings lots of comfort to potential new customers to make decision. Sticky revenue model: On back of strategic long term relationship (15 to 30 years), visibility of annual insurance revenue is over 75% on day one of fiscal year. Huge mining opportunity: The company has potential to double its revenue just by further penetrating its existing 80 insurance customers on back of cross sell and upscale. Elixir N.America success a trigger: The end-to-end implementation of beta version of Elixir N.America with Foresters, Canada based life insurance player is under process; success remains trigger for growth. Diversifying revenue risk: After getting initial success in US P/C industry it is focusing to enter UK P/C markets. GuideWire entered UK markets recently and demonstrated healthy growth. Various margin levers: Mastek could achieve EBITDA margins of 8.5-9.4% over medium-term on back of various margin levers which could come from most line items including R&D, SG&A and EBITDA margins. Hidden Valuations: The stake divestment in premium insurance solution business could expand Mastek’s overall market-cap to Rs.8,181 mn (v/s Rs.3,936 mn current). Strong position in US P/C industry: The Company remains the leader in third-party software vendor in P/C billing solutions. Also rated amongst Top 3 P/C insurance platform vendors in N.American with 7 of Top 25 insurance carriers as customers. Favourable Order Book: Mastek’s twelve month executable order book illustrates well balanced revenue growth outlook, which constitutes ~58% insurance, ~26% government and ~16% others. Government Business: The revenue outlook of government segment looks robus on back of recent deal wins from U.K. government through G-Cloud. However, negative surprise could come from downscaling in BT business. Financial & IT Services: The segment growth could be driven by regulatory changes in the banking and insurance, new age IT, and recent deal win from retail major (Morrisons Plc). Risk & Concerns Dependence on few verticals/clients. Newer market investment remains a risk. Higher SG&A could impact margin. Valuations At CMP of Rs.160, Mastek is trading at inexpensive valuations of 6.5x/5.3x and 0.41x/0.35x its FY14E/FY15E earnings and EV/Sales estimate, respectively. We maintain BUY with target price to Rs.193 on Mastek.

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