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IT Software Products

SOUMITRA CHATTERJEE

Vice President - Research

[email protected] +91 22 4228 8151

OMPRAKASH KAVADI

Analyst – Research

[email protected] +91 44 4344 0096

Sector Outlook

POSITIVE


Chasing growth over quality

Market data

BSE Sensex 26,813

NSE Nifty 8,220

Date June 22, 2016

Performance (%)

1m 3m 12m

CNX IT 4 3 2

Sensex 6 6 -2

The growth rates for IT Services vendors have declined to single digits now as disruptive technologies bring

structural headwinds into play. However, the software product companies are seeing an inflection point on

growth driven by investment in front end technologies which is driving adoption of software products based on

latest technologies. Whilst we are aware that there have not been a single case of successful software company

since OFSS, we also take cognizance of the fact that couple of Indian software companies, namely Intellect

Design Arena and Majesco have consistently invested in R&D over the last many years and have built strong

products and due to these investments in the business they are seeing strong revenue growth. The market

opportunity for both Intellect and Majesco is similar at around $9bn with market growing at similar rate of 8%.

We reiterate BUY on Intellect with target price of Rs290 and initiate coverage on Majesco with BUY and target

price of Rs720. OFSS on the other hand has suffered due to hike in prices and loss of focus post acquisition by

Oracle Corp and has suffered from dwindling growth rates. Initiate with SELL and target price of Rs.3,020.

Growth will be seen more with smaller vendors and not the established ones

An issue that has become clear over time is that established suppliers are seldom the source of new systems. They

seem unable to rewrite their core offerings. Innovation has tended to come from smaller players, often set up by ex-staff

of large suppliers. The incumbent suppliers do not seem to have culture of innovation. Though they continue to invest in

R&D, it is largely around their core offerings. They also have the complication of existing user bases, from both the

perspective of having to satisfy the demands of current customers as well as the challenge of positioning their new

development is such a way as to not jeopardise sales of existing applications. New product companies doesn’t come

with these baggage and product is based on latest technology which drives user acceptance.

Market opportunity is large and growing with medium term growth drivers in place

The current market opportunity for the third party banking and insurance software providers stands roughly around $9bn

and is expected to grow at the rate of 8% over the next three years. This is largely being driven by investments in front

end digital solutions as consumer banking, payments and remittances, and digital banking would face maximum

disruption in the banking segment and clients wants to be prepared for this thus making investments. On the insurance

segment, growth is completely driven by investments in digital technologies such as social media, telematics and

analytics that are redefining the insurance market.

Key Ideas – BUY on Intellect and Majesco and SELL on OFSS

Most of the decline in the stock price of the Intellect can be attributed to accounting policy change of capitalizing the

development portion of the R&D expenses. We would like to argue that accounting policy change if followed

consistently and disclosed properly, doesn’t have a bearing on long term valuations of the company. On OFSS, with all

its key markets saturating and loss of focus post acquisition by Oracle in 2005, the proportion of licence fees has fallen

from 47% in FY03 to 16% in FY16. We see growth stagnating in OFSS’ markets of Africa and Asia Pac and believe

large wins in the US will be difficult to come by. By not cutting the R&D investments in a weak growth period, Majesco is

now reaping the benefits as the market is growing and so is order book and revenues.

Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

SOUMITRA CHATTERJEE [email protected] +91 22 4228 8151

OMPRAKASH KAVADI [email protected] +91 44 4344 0096

-20%

-10%

0%

10%

Jun-15 Sep-15 Dec-15 Mar-16 Jun-16

Sensex BSE 200

Sector Outlook

POSITIVE


Dilemma of moving from software services to software products

Dividends

Increase in dividend payout / buy back of shares

Good cash flow conversion

2/3rd to 3/4th of the EBITDA is reflected in the operating cash flows

Margins under pressure

Mid cap IT services companies generate ~15-17% margins while larger IT companies managed ~20-25%

Revenue growth trending downwards

The growth is moving downwards from mid teens to high single digit due to structural changes

Need for capital in business

Intellect and Majesco are doing QIP while Ramco has already done QIP. Since FY15, OFSS in particular, rewards shareholders with dividends while Nucleas and Subex are challenged for growth

Cash flow generation needs to improve

Intellect, Ramco & Majesco are in an investment mode, while OFSS and Nucleas generate cash flows similar or higher than IT service companies

Mixed margins

Barring Intellect & Majesco which are relatively new product companies, Nucleas, Subex, Ramco make ~20% margins while OFSS deliver ~40% margins

Strong revenue growth

Strong revenue growth over the last 2 years. Around 25% of the revenues are driven by product replacement cycles

Software Services Companies Software Product Companies

A sustainable revenue

growth of ~25% would

result in better margins

and improved cash flow

generation

Sector Outlook

POSITIVE


At present, the total spend on banking software stood at $37bn with more than 30% allocated to core banking while the amount spent on third party packaged software is $8bn which is expected to grow to $11bn in the medium term

Banking software products came into prominence as financial institutions realized the inability of their legacy IT systems built in-house, to cater to the modern day needs. In addition, the cost of maintaining these systems amounted to c75% of the IT budgets leaving very less room for value enhancing and innovative IT spends

Packaged software products provide a platform which is flexible, scalable and operationally conducive and thereby include innovative features for better customer experience

The insurance global market comprises of Property & Casualty business with 44% market share while Life & Annuity constitutes 56% of the share

The addressable market size is $25bn with $4.8Tn premium volume and over 11,000 insurers globally

In the past year, 24% of the insurance companies have replaced their legacy systems while the number is expected to reach 50% in the next three years

Enterprise IT spending in the Insurance industry is estimated to reach $185bn in 2019 with a CAGR of 2.8% for 2015-19e

The global ERP software market size is expected to reach $42bn growing at a CAGR of 7% during 2014-20e. On-Premise ERP software is expected to hold a majority stake of up to 57% by 2020, while the cloud based ERP is projected to grow up 10% by 2020 . The adoption of ERP is expected to be rapid in Aerospace and Defence Vertical at a CAGR of 8.9% for 2014-20

The HRM software market size is estimated to be $9.2bn by 2022

The CRM software market size stood at $23bn in 2014 and is expected to reach $36.5bn in 2017

Banking Insurance Manufacturing (ERP/HCM/CRM)

Will the revenue growth sustain?

Market opportunity has always been bigger for Banking and Insurance companies

Banking products space: Temenos, Finacle, TCS BanCS, OFSS, Fundtech, Bottomline Technologies, ACI Worldwide, FIS, Misys

Insurance players: Guidewire, Innovative Group, CSC, Oracle, StoneRiver, Sunguard,FiNeo s

HCM/CRM: Salesforce, Workday, Peoplesoft, Netsuite, Advent, Cornerstone, Ultimate, Concur

Key Global

Competitors

Fin-Tech Software market segment revenue

Source: Nasscom

Banking, 47%

Insurance, 33%

Securities, 20%

Global Enterprise Software Market *($bn)

Source: Nasscom, * ERP,CRM, HCM,SCM

70

85

0

20

40

60

80

100

2013 2016

Global Fin-Tech market in $bn

Source: Nasscom

32 45

249 315

0

100

200

300

400

2015 2020 Fin-tech Software Services

Sector Outlook

POSITIVE


Banking sector – Third party spend is only 20% of total spending on banking software

Total IT spend in Banking and Financial sector

Source: Gartner 2014, Spark Capital

The growth in IT spend on software segment stands out

Source: Gartner 2014, Spark Capital

Digital is driving most of the spending on third party software

Source: CEB 2013 customer experience survey

76%

53% 48%

26% 24%

13%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Online ATM In person Over the phone

Mobile application

Mail

38%

18%

18%

14%

6% 5%

IT Services Internal Services Telecom Services

Software Devices Data Centre

The addressable market of $8bn is growing at 8% CAGR

Source: Temenos, Spark Capital. Note: spend includes license and maintenance

Banking segments CAGR

Payments +11%

Fund Admin +10%

Channels +6%

BI +9%

Wealth +7%

Core banking +5%

$37 bn

$8bn

$11bn

0

5

10

15

20

25

30

35

40

Total spend Third-party spend today

Medium term third-party spend

-8%

-4%

0%

4%

8%

12%

CY13 CY14 CY15 CY16 CY17 CY18

Total growth Internal services IT Services Devices Data Centre Telecom services Software

Sector Outlook

POSITIVE


Revenue growth in smaller companies has been erratic

Source: Bloomberg, Spark Capital

Market shares* for top product and service companies during 2015

Source: Bloomberg, Company data, Spark Capital,*License+ Maintenance revenues

Bigger players are experiencing moderating revenue growth

Source: Temenos, OFSS, Spark Capital, For Temenos, FY represents previous year CY

5.8%

3.2%

5.1%

2.8%

0%

1%

2%

3%

4%

5%

6%

7%

IBM HP Temenos OFSS

Service Companies Product Companies

The systems that have often gone into decline in larger companies

have had complications of positioning and/or departing of key

individuals. Companies such as Temenos, Avaloq, Calypso and

Murex mostly succeed or fail based on their efforts with their clear

flagship solutions. If we were to quote IBS sales league table from

Jan-Dec 2014 published in March 2015, 9 of the top 10 selling

suppliers have one clear flagship platform. The only exception is

SunGard, that gained 10 wins from its Ambit Treasury System.

Hence, in our view, the third party software market has moved more

towards module based selling and this is precisely the reason behind

smaller vendors like Intellect showing stronger growth.

46.8%

0.2%

-14.4%

-3.6% -0.5%

-8.6%

6.2%

0.8%

-7.7%

40.0%

-8.9%

11.8%

38.6% 36.7%

-17.3% -1.5%

12.4%

25.3%

10.3%

7.0%

18.0%

1.4%

73.7%

31.0%

-0.4%

25.6%

3.1%

-40%

-20%

0%

20%

40%

60%

80%

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Nucleas Intellect Silverlake

Banking Segment - However, growth is likely to come from smaller companies while the larger players

are witnessing moderating growth

23%

-9%

21%

6%

-5%

4%

0%

5% 8%

-5%

8%

0%

-3%

-3%

3%

-2%

-20%

-10%

0%

10%

20%

30%

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Temenos OFSS

Sector Outlook

POSITIVE


An issue that has become clear over time is that established suppliers are seldom the source of new systems. They seem

unable to rewrite their core offerings. Innovation has tended to come from smaller players, often set up by ex-staff of large

suppliers. Examples are Frustum (Ex-IMMS), Calypso (Ex-Infinity) and more recently, Trapedza (Ex-Kindle) and TwoFour

Systems (Ex-Frustum/Misys). The incumbent suppliers do not seem to have culture of innovation. BIS for instance tried to

rewrite in the late 1980s of Midas. IBIs tried to rewrite its system in the second half of 1990s. They also have the complication

of existing user bases, from both the perspective of having to satisfy the demands of current customers as well as the

challenge of positioning their new development is such a way as to not jeopardise sales of existing applications.

Smaller players like Intellect are better placed than OFSS to innovate new products

The latest to try a rewrite is OFSS with its new platform called Oracle Banking Platform (OBF) with Australia based NAB and

Suncorp as its first takers. At least OFSS had scale on its side but history and data till date suggest that it will be a difficult

task to achieve. Only two vendors have tried to rewrite their code and succeeded. First one is Lebanon based BML Istisharat

which rewrote its ICBS system and has a relatively flexible modern solution. The second example is Norway based CBA

which has done the same with its IBAS offering, resulting in Java based Object Oriented Solution (OOS). This is one reason

why new start-up companies like Intellect might win over OFSS. However, even for start-ups even with experienced founders,

there is no guarantee of success though the chances are higher. The only challenge is facing an uphill task not just initially

but possibly over time due to having to compete with massed sales and R&D staff of established companies.

Rewriting the systems is difficult to be a success

Reasons why smaller players are recording strong growth and larger players are either stagnant or

growing through acquisitions

Sector Outlook

POSITIVE


Banking sector – Consumer banking likely to be more disruptive

Investment in front end digital technologies driving disruption

80%

60%

38% 34%

29% 26% 24% 19%

13% 9% 9%

2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Consumer Banking

Fund Transfer & Payments

Investment & Wealth

Management

SME Banking Brokerage Services

Property & Casualty

Insurance/ Life Insurance

Commercial Banking

Insurance Intermediary

Market Operators & Exchanges

Fund Operators

Investment Banking

Reinsurance

Source: PWC Global FinTech Survey 2016

INDA already figures in Gartner’s Leaders quadrant

Source:

Consumer banking and fund transfers &

payments are likely to be the most disrupted

sectors by 2020

LEADERS CHALLENGERS

VISIONARIES NICHE PLAYERS

BML Istisharat

TCS

AB

ILIT

Y T

O E

XE

CU

TIE

COMPLETENESS OF VISION

Datapro

Sopra Banking Software

(Sopra Banking Amplitude)

SAB

Silverlake Axis Fiserv (Signature)

Fiserv (DNA)

Misys

Oracle

INDA Avaloq

Temenos

SAP Infosys

Intellect Design – Intellect Digital Core was launched in 2005 and

has a customer base of 200 spread across North America, EMEA and

Asia/Pacific

Strengths

Kernel based development methodology that helps in organizing

functionality

Intellect performs a root cause analysis post feed back from

customers and creates an action plan to remedy underlying problems

Weaknesses

Many intellect reference survey banks find the core banking

reporting capabilities to be a mismatch with their requirements Source: Gartner , April 2016

Sector Outlook

POSITIVE


OFSS core banking deals won since ‘99

Source: IBS intelligence, Spark Capital

Core banking product deals since CY08


Temenos core banking deals won since ‘99


Infosys core banking deals won since ‘99


0

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CY 08 CY 09 CY 10 CY 11 CY 12 CY 13 CY 14 CY 15

Banking Segment - In the Core banking deals there has been mild improvement in deal flow over the last

2 years, but driven by 5 years of massive decline in deals

Sector Outlook

POSITIVE


Lending (Misys) module deal wins over time


Loans Management (SAP) module deal wins over time


Treasury (SunGard, now FIS) module deal wins over time


FinnOne (Nucleus) deal wins over time


Banking Segment - Globally, module based systems are gaining consistent traction as software is written

in new technology

0

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CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15

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Sector Outlook

POSITIVE


Intellect Treasury module should see increased traction


Intellect Lending module deal wins since ‘06


Intellect Core module deal wins since ‘06


Intellect Wealth Management module deal wins since ‘06


In India, Intellect Design is gaining traction with total live installations crossing 374 ( up 61 from FY15)

0

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Sector Outlook

POSITIVE


A number of technology companies have also been encroaching such as those with pricing and billing engines, extending from telecoms and public utilities sector into banking. BPM components have also become important from the likes of Oracle, Pega Systems, IBM, ILOG (now owned by IBM) and Microsoft with banks seeking to apply these to provide greater flexibility and agility. Oracle components have been increasingly embedded into Flexcube and BPM tools are more generally playing a greater role in back offices of some banks, sometimes due to regulatory reasons and often due to operational control and documentations.

Increased role of technology

There might be a swing back to in-house development in some banks using the mix and match approach where packages are surrounded by home grown components with these home grown components being competitive in nature. There has been a small but seemingly growing number of banks around this in-house development. Example are Belgian Bank, Bank J Van Breda, which rejected the package route in 2015. A bigger example would be HSBC’s transformation plans, with its OneHSBC strategy, which ended up with strong in-house development after packages were largely rejected, at least for core banking.

Hybrid model entailing in-house and third party packages

There has also been growing demand for hosted back office solutions. In the last couple of years, there has been a pick-up in momentum including more suppliers setting up hosted solutions such as ERI and FiServ in the UK, FIS in Poland and Avaloq in number of centres around the globe. However, some suppliers remain wedded to their traditional license fees models but now is the time when they should see a business case despite knowing that they are making good margins on maintenance revenues by not doing a lot each year.

Adoption of cloud based models to drive growth

Key risks to growth - With technology advancing rapidly, it is imperative to adopt latest technologies in

order to meet changing expectations

Sector Outlook

POSITIVE

IT Software Products Banking sector - software on cloud is a massive opportunity for Intellect once they launch full service

cloud offerings

Advantages of SaaS model

Easily scalable

Reduced costs with pay as you go model

and automatic software upgrades

Increased flexibility

Easy accessibility

Global SaaS market opportunity

Source: Nasscom, Spark Capital

$ 31bn

$ 72bn

0

10

20

30

40

50

60

70

80

2015 2020

Global SaaS market revenue by segment in 2015

Source: Nasscom, Spark Capital

39.5%

16.4%

10.7%

7.6%

3.0%

3.7%

2.1%

1.8%

15.3%

CRM

ERP

CCC

SCM

BI

Office suits

PM

Digital content

Others

Temenos software rev distribution across licensing and Saas in $m

Source: Temenos, Spark Capital

160 146

125 138 140 173

5 8

26.5

0

40

80

120

160

200

2010 2011 2012 2013 2014 2015

Software licensing Software-as-a-Service

Oracle License vs. Cloud revenues

in $bn

Source: Oracle, Spark Capital

13 13 15

1 1

2

0

5

10

15

20

2013 2014 2015

License revenues Cloud revenues

SAP License vs. Cloud revenues

in $bn

Source: SAP Spark Capital

13 13 15

1 1

2

0

5

10

15

20

2013 2014 2015

License revenues Cloud revenues

Indian SaaS market size stood at $302m in

FY2015 and is expected to grow 3X by FY2020

The revenue contribution of cloud subscriptions

have been rising for the Global players like

Temenos, Oracle, SAP etc

Sector Outlook

POSITIVE


Why we prefer Intellect Design over OFSS

•We expect Intellect Design to register growth rates of ~20-25% in the next 3 years while OFSS’ revenue growth is expected to grow ~4-5%

Revenue growth

•An issue that has become clear over time is that established suppliers like OFSS are seldom the source of new systems. Innovation has tend to come from smaller players, often set up by ex-staff of large suppliers. Established players also have the complication of existing user bases, from both the perspective of having to satisfy the demands of current customers as well as the challenge of positioning their new development in such a way as to not jeopardize sales of existing applications

Product portfolio

•With continued investments in R&D, the product portfolio of Intellect Design is equipped with newer technologies, while OFSS has witnessed declining trend in the investments which is affecting the product performance

Investments

•We expect Intellect Design to register strong margins and improved cash flows with a steady progress in deal wins and installations

Margins and cash flows

Intellect design’s continued investments in R&D (INRm)


OFSS investments in R&D is below par at ~10% of revenues


9% 10%

0%

2%

4%

6%

8%

10%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

FY09 FY10

R&D expenses (INRm) As % of Revenues

797 870

1,220 1,292

16% 16%

20%

16%

0%

4%

8%

12%

16%

20%

24%

-

200

400

600

800

1,000

1,200

1,400

FY2013 FY2014 FY2015 FY2016

R&D expenses As % of Revenues

Sector Outlook

POSITIVE

IT Software Products Insurance Segment -Technology has the maximum impact among external forces on the US property-

casualty market in 2016

Source: EY report on US property-casualty market, 0 = Very low impact and 10 = Very high impact

Technology

Digital technologies such as social media, telematics and analytics are redefining the insurance market

The impact will be diverse ranging from marketing and distribution to customer service and pricing models

Pricing

Greater competition and pricing transparency will hold down fees in both personal and commercial sectors

Insurers will need to reconsider pricing models as pay-as-you-go gathers appeal and analytics provide deeper customer insights

Customer Expectations

Greater competition and pricing transparency will hold down fees in both personal and commercial sectors

Insurers will need to reconsider pricing models as pay-as-you-go gathers appeal and analytics provide deeper customer insights

Economy and interest rates

Economic outlook is for modest growth, although global volatility will create greater uncertainty and downside risks.

Low US interest rates continue to pressure underwriting, with at most only modest hikes in 2016

Regulations

Heightened regulatory creep is starting to become a bigger concern

In 2016, insurers will need to assess the potential implications of changing regulations, and start planning for greater impact in 2017 after the US elections

Catastrophes

Continuation of moderate activity keeps downward pressure on pricing. Only a very large and unexpected event (or events) has the potential to be market-changing

After years of relative calm, a big loss event could be more likely

10

9

8

6

5

2

Sector Outlook

POSITIVE


Global IT spending by Insurance companies in $bn

Source: Celenet, Spark Capital

78.5

54.5

31.4

5.3 5.3

84.4

56.8

35.6

6.7 5.8

0

10

20

30

40

50

60

70

80

90

North America Europe Asia Pacific LATAM Others

2015 2017

Digitization, Mobile applications and Legacy modernization are taking

major share of IT investments by global insurance players

Source: Gartner, Guidewire Investor Day Presentation

18% 15%

13% 10%

6% 6% 6%

4% 4% 4%

3% 3%

2% 2%

1%

0% 5% 10% 15% 20%

Digitization Mobile Apps

Legacy modernization Portals

Risk Management Channel Management

Product/Service Innovation Outsourcing

Cloud Computing Analytics

Strategic Alliances Internet of Things

Claims Transformation Social Media

Cyberinsurance

Cloud investments by insurers

Source: Majesco Investor day presentation

Insurance sector – IT investments driven by digital innovations and a need to improve operational

efficiency

No change, 43%

Increase, 27%

Significant Increase,

21%

No investments

, 9%

Insurer average IT budget breakdown

Source: Majesco Investor day presentation

Core, 40%

Digital, 20%

Data, 20%

Security, 10% Other, 10%

IT investments in Insurance industry became inevitable in

order to provide next generation technology solutions

around mobile, big data, cloud etc to address changing

risk profiles and expectations of the customers

Enterprise IT spending in the Insurance industry is

estimated to reach $189bn in 2016 and a CAGR of 1.8%

through 2019

Almost 80% of the investments are directed towards Core,

Digital and Data

Average insurer IT spend is estimated to be ~3.6% of

premium in 2016

Sector Outlook

POSITIVE

IT Software Products Insurance industry – If Majesco gets the acquisition right, then it can move from the Visionary

quadrant to the Leaders quadrant in the P&C segment. L&A will need more efforts

Worldwide Policy Administrative Systems* 2015 Vendor Assessment

Source: IDC, * includes P&C and Life & Annuity

Magic Quadrant for Life Insurance PAS, North America

Source: Gartner, February 2016

LEADERS CHALLENGERS


Infosys McCamish

EXL

InsPro Technologies

FAST Technology

Vitech Systems Group Mphasis Wyde

CSC (Wealth Management)

Sapiens

Andesa Services Majesco

MDI CSC (CyberLife)

Concentrix

Accenture

Oracle

AB

ILIT

Y T

O E

XE

CU

TIE


Magic Quadrant for P&C Insurance PAS, North America

Source: Gartner, January 2015

LEADERS CHALLENGERS


OneShield Instec

Majesco

Accenture

Guidewire

AB

ILIT

Y T

O E

XE

CU

TIE


Participants

Contenders

Major Players

Leaders

STRATEGIES

CA

PA

BIL

ITIE

S

Guidewire

Accenture

Fadata Oracle

StoneRiver SunGard EXL

Majesco

CSC

Sapiens

Magic quadrant for P&C Insurance Claim Management Module

Source: Gartner, June 2015

LEADERS CHALLENGERS


CSC

Accenture

Guidewire

AB

ILIT

Y T

O E

XE

CU

TIE


Insuresoft Keylane

Innovation Group

SAP

Majesco

Sector Outlook

POSITIVE


Majesco P&C Insurance Policy Management Module

Strengths

Comprehensive policy management functionality with built-in

components

Tools catering to both Insurance Content Manager and Insurance

Content Designer

Prebuilt content used to support personal and commercial LOBs

Equipped with mobile and portal capabilities

Experienced with hosted deployments and deployment via cloud

services, such as AWSV

Weaknesses

Limited experience supporting workers’ compensation and specialty

lines

Limited history of supporting large premium volumes in production.

Customers feedback about delay in implementation timeframes

Integration with Cover-All in process

SI partner program includes only Deloitte and IBM

Historically focused on the North American Insurance core solution

market

Source: Gartner

Pros and Cons for Majesco P&C and Life Insurance policy management modules

Majesco Life Insurance Policy Management Module

Strengths

Flexible rule engine and easy configurability

Easy accessibility to data and calculations to support self-service

functions, mobile support and other emerging technologies for agents

and customers

High level of self-sufficiency due to the scripting language that is used in

the system that can be learned by business analysts and actuaries.

Weaknesses

No live customers on group life

Majesco Policy system has not been used in production for large-volume

Tier 1 implementations, and lacks live implementations to prove scale

Continuing issues with resource constraints and availability of skilled

individuals knowledgeable in Majesco Policy, and annuities

Implementation challenges while customizing to the customer

requirements

Sector Outlook

POSITIVE


Guidewire customers by Tier

Source: Guidewire

Guidewire : P&C segment customer deal trends

Source: Guidewire Investor day presentation

57 71

84 101

130

158

183

207

0

50

100

150

200

250


Insurance Sector - Led by Investment in Digital, finally the Insurers are replacing Legacy Systems

Guidewire cumulative licenses by product


53 62 76 92 116 131 151 170 8 17

26 32

46 61

82 102

6 10

14 18

35

50

69

95

0

50

100

150

200

250

300

350

400


ClaimCenter BillingCenter PolicyCenter

Guidewire adoption of insurance suite


161

194

229

0

50

100

150

200

250

FY13 FY14 FY15

Lic

en

se +

Main

ten

an

ce (

$M

)

41%

Multi-Product

2

7 7 34

13 7 78 48%

Multi-Product

2

11 8 34

15 8 80 50%

Multi-Product

27

10 7 71

11 10 81

Policy Billing Claim

36 65

57 35

43

16 23

62

FY12 FY15

<$300M

<$300M to <$1B

$1B to <$5B

>$5B

22%

18%

13%

13%

3 Yr CAGR

Sector Outlook

POSITIVE


Accounting policies

Company License fees Implementation fees AMC fees R&D expenses

Ramco

On delivery of

software

Based on percentage completion

method in case of fixed contracts

and in case of time and material

contracts, recognized based on

billable time spent at the

contractual rate

Pro-rata basis over the contract

period Research costs are expensed and

Development costs are capitalized Pro-rata basis over the contract

period Intellect Design

Majesco

Recognized on

an annual

license fee basis

Annual, quarterly or monthly

payments on recurring basis

Research and development costs are

expensed

Nucleus

On delivery of

software

Pro-rata basis over the contract

period Research costs are expensed while

Development costs are expensed unless the

technical feasibility is established, in which

case, these costs are capitalized OFSS

Straight line basis method over the

period of contract

Subex Recognized on a time proportion

basis

Research and Development costs are

expensed. Fixed assets used for R&D are

capitalized

Most of the product companies follow almost similar accounting policies for License, AMC and Implementation fees. Only difference is R&D

expenses which few companies capitalize and few companies expense out. However, if capitalized R&D and R&D expensed out are separately

disclosed, then it doesn’t impact long term valuations. For example Temenos capitalizes R&D while OFSS expenses out R&D, but still Temenos

trades at 40% premium to OFSS due to high growth.

Sector Outlook

POSITIVE


Globally, software product companies gave better returns compared to the services companies

Founded Stock price return (%) Revenue CAGR (%) EBITDA CAGR (%) PAT CAGR (%)

Global prod companies 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs

Salesforce 1999 13% 110% 137% 700% 1100% 24.1% 29.8% 32.1% 29.8% 35.9% 111.7% 82.1% 20.4% 22.1% 31.7% NA NA NA NA NA

Ultimate 1990 27% 84% 310% 726% 850% 22.2% 23.0% 22.1% 19.4% 21.4% -11.6% 15.0% 26.4% 42.4% 24.5% -49.3% 15.8% 60.1% NA 20.8%

FiSERV 1984 33% 146% 242% 357% 385% 3.7% 5.8% 4.9% 2.0% 2.6% 7.1% 7.3% 5.1% 4.6% 6.5% -5.6% 5.2% 7.5% 3.3% 3.3%

Guidewire 2001 21% 57% 245% NA NA 8.6% 17.9% 21.3% 27.2% NA 14.5% 2.8% 8.2% NA NA -32.9% -13.4% -8.6% NA NA

Temenos 1993 69% 167% 107% 212% 377% 15.7% 6.4% 3.9% 4.2% 12.4% -1.4% 18.3% 7.9% 8.7% 18.2% -27.6% 38.2% 1.5% 0.4% 13.8%

Jack Henry 1976 30% 81% 193% 334% 346% 7.1% 6.9% 8.5% 7.8% 8.9% 10.3% 9.7% 11.5% 9.9% 10.7% 13.1% 10.9% 12.4% 10.6% 10.8%

Bottomline 1989 -7% -8% 15% 199% 186% 10.1% 13.8% 15.9% 14.1% 13.1% 25.1% 12.1% 10.7% 28.4% 13.4% 81.5% NA NA 30.9% NA

FIS 2006 21% 69% 139% 275% 102% 2.8% 4.3% 4.6% 9.8% 9.1% -7.2% 0.7% 4.4% 12.0% 9.2% -7.0% 11.0% 9.3% 16.7% 12.4%

ACI Worldwide 1975 -11% 44% 123% 335% 67% 2.9% 16.2% 20.1% 14.0% 12.8% 0.2% 21.7% 23.0% 26.4% 12.5% 26.5% 20.5% 25.7% 34.8% 7.1%

Workday 2005 2% 24% 67% NA NA 47.5% 61.9% 76.4% 110.3% NA 13.1% 20.5% 27.6% NA NA 16.9% 34.5% 38.8% 28.0% NA

Oracle 1977 -11% 16% 26% 88% 176% -0.1% 1.0% 7.3% 7.9% 12.5% -5.3% 0.2% 8.1% 8.4% 13.1% -9.3% -0.1% 10.1% 8.8% 13.2%

SAP 1972 11% 7% 37% 97% 60% -1.1% 3.4% 6.9% 4.4% 8.1% -13.3% -0.8% 8.2% 3.4% 6.9% -21.9% -1.9% 7.2% 3.3% 6.2%

Global Service companies

Accenture 1951 25% 48% 115% 280% 364% 3.3% 3.4% 7.3% 3.8% 6.8% 3.3% 4.4% 8.4% 5.4% 8.2% 3.8% 6.1% 11.4% 8.8% 12.5%

Cognizant 1994 -6% 82% 66% 353% 282% 21.0% 19.1% 22.0% 23.6% 30.2% 18.1% 17.6% 20.5% 22.7% 28.7% 12.8% 15.6% 17.2% 20.9% 25.6%

Cap Gemini 1967 13% 135% 133% 234% 109% -5.8% 0.1% 2.8% 0.5% 4.3% 1.7% 10.0% 10.1% -0.2% 10.5% 61.9% 40.1% 27.4% 9.4% 21.7%

Genpact 1997 26% 44% 86% 152% 80% 8.0% 9.0% 14.3% 13.1% 17.5% 11.6% 6.7% 10.6% 9.2% 14.2% 24.9% 10.4% 11.0% 9.7% 30.2%

WNS 1996 16% 93% 247% 282% 25% 5.3% 6.9% -1.8% 1.1% 10.7% -1.9% 10.2% 9.9% 0.3% 12.6% 2.2% 40.9% 27.3% 32.9% 12.6%

Indian product companies might replicate the Global trend to provide better returns than service companies, but this might happen in next 3-5 years

Founded Stock price return (%) Revenue CAGR (%) EBITDA CAGR (%) PAT CAGR (%)

Indian product companies 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs 1 Yr 3 Yrs 5 Yrs 7 Yrs 10 Yrs

Ramco Systems 1992 10% 675% 604% 576% 335% 16.1% 15.9% 8.8% 7.6% 1.5% 36.3% NA 21.6% 50.5% 28.8% 209.1% NA 76.2% 52.7% NA

OFSS 1990 -1% 25% 52% 163% 265% -2.0% -0.7% -1.0% -0.3% 6.4% 14.2% 13.1% 9.6% 12.5% 18.6% -2.2% 2.7% 1.0% 6.8% 17.2%

Intellect 2014 105% 171% NA NA NA 23.8% NA NA NA NA NA NA NA NA NA NA NA NA NA NA

Majesco 2014 65% NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA

Nucleus 1986 -16% 201% 148% 119% -25% -7.7% -0.4% -2.1% -4.2% 4.8% -53.2% -12.7% 0.0% -7.0% -3.9% -49.8% -10.4% 4.3% 0.1% -1.3%

Subex 1992 -9% 28% -86% -79% -98% -16.0% -4.4% -14.1% -12.1% 1.9% -25.6% 11.4% -11.0% 4.8% 3.7% 474.9% NA -5.7% NA 4.5%

Indian services companies

HCL Tech 1976 -20% 100% 196% 660% 582% 5.7% 10.3% 12.5% 16.5% 19.9% 3.8% 15.7% 26.5% 22.5% 23.6% 0.5% 22.1% 34.9% 27.8% 26.7%

TCS 1968 1% 72% 120% 581% 521% 7.3% 12.8% 15.2% 15.4% 18.7% 27.5% 19.2% 22.3% 23.0% 23.4% 22.4% 20.4% 21.8% 24.4% 23.4%

Infosys 1981 23% 102% 73% 184% 266% 9.4% 8.8% 9.6% 10.5% 16.1% 12.9% 14.0% 13.8% 13.1% 18.6% 10.9% 13.2% 14.9% 12.5% 18.7%

Wipro (IT arm) 1980 -2% 63% 24% 119% 106% 2.0% 4.5% 2.8% 4.8% 12.6% 3.4% 12.3% 10.6% 10.5% 15.3% 2.8% 10.2% 10.9% 12.5% 15.7%

Tech Mahindra 1986 -3% 14% 53% 49% 97% 9.5% 47.4% 29.1% 22.5% 30.6% 2.6% 43.8% 33.3% 18.6% 31.3% 18.7% 34.3% 37.1% 17.4% 29.5%

Software services companies are facing structural headwinds while product companies are enjoying

tailwinds

Sector Outlook

POSITIVE


Salesforce Revenues and Growth yoy trends over last 10 years


Temenos Revenues and Growth yoy trends over last 10 years


FIS Revenues and Growth yoy trends over last 10 years


Ultimate Software Revenue and Growth yoy trends over last 10 years


0%

10%

20%

30%

40%

50%

60%

70%

80%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Revenues ($mn) Growth yoy (%)

0%

5%

10%

15%

20%

25%

30%

35%

0

100

200

300

400

500

600

700



-50%

0%

50%

100%

150%

200%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000



Product companies with revenue base of over $1bn generally have followed inorganic path while also

offering additional services around their core products.

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0

100

200

300

400

500

600



CMP

Rs. 203

Target

Rs. 290

Rating

BUY

Intellect Design Arena

Stock performance (%)

1m 3m 12m

INDA -3 1 95

Sensex 6 6 -2

CNXIT 4 3 2

Update Date 22 June, 2016

Market Data

SENSEX 26,813

Nifty 8,220

Bloomberg INDA IN

Shares o/s 101mn

Market Cap Rs. 21bn

52-wk High-Low Rs. 303-100

3m Avg. Daily Vol Rs. 203mn

Index member INDA IN

Latest shareholding (%)

Promoters 32.5

Institutions 18.9

Public 48.6

Company Update The stock of Intellect Design Arena (INDA) has declined 27% since the start of CY16. The bulk of the decline has

been due to revenue miss in Q3 and Q4FY16 coupled with accounting policy change of capitalizing the

development portion of the R&D expenses. We would like to argue that accounting policy change if followed

consistently and disclosed properly doesn’t have a bearing on long term valuations of the company – example

Temenos. The longer term valuations of the company is impacted by growth – example OFSS, and with Intellect

growing 25% in FY16 and poised to grow 20-25% in FY17 and FY18, we only see multiples improving with

consistent revenue growth and improving profitability. Reiterate BUY with target price of Rs290.

Expect consistent revenue growth of ~20-25% over the next 3 years

Capitalisation of R&D expenses is not a cause of concern and should be best ignored: In our view street has

focussed too much on the capitalisation of development portion of the R&D expense. This is the first accounting policy

change at Intellect and until it is followed consistently and disclosed properly, it won’t have any major impact on long

term valuations of the company. Temenos also capitalises development expenses but discloses the capitalised

development portion consistently every quarter and still trades at 40% premium to OFSS due to higher growth.

Why was it done in 4QFY16, why not adopt change from new fiscal? In our view the only reason why this

accounting change was done in the last quarter of the year and now from new fiscal would be to show lower losses for

FY16 and to show that the company has turned profitable. In many banking deals it becomes difficult for loss making

companies to qualify for the deals. Doing this from Q4FY16 might help INDA to qualify for certain deals and hence it is

more of a business decision in our view.

Revenue growth trajectory improving: Over the last three years INDA has grown its revenues by a CAGR of 12%

with bulk of the growth coming in FY16 (25%) and FY15 (12.5%). Over the next three years the focus is to sell more

products to existing clients thereby increasing products per client from 1.3 currently to 2.5. This is being done by giving

full P&L responsibility to four different product CEOs of the product they lead. These four different product CEOs are

having separate sales team and separate functional R&D team bringing accountability. We expect 25% revenue CAGR

over the next three years.

Margins might improve but investments to continue: To drive profitability, INDA has partnered with various IT

vendors throughout FY16. While we do expect margins to improve by 200bps in FY17 and further 200bps in FY18,

investments in the business especially in sales and marketing and R&D will continue.

Growth matters, not accounting policy change

Financial summary

Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) RoE(%)

FY15 6,048 -842 -830 -8.2 NA NA

FY16 8,065 -314 -168 -1.6 NA NA

FY17E 10,012 560 231 2.2 92.8 3.7

FY18E 11,947 1,303 763 7.2 28.1 11.2

CMP

Rs. 203

Target

Rs. 290

Rating

BUY

Intellect Design Arena Accounting policy change if followed consistently and disclosed properly does not

impact long term valuations

Temenos : Development costs capitalized over time in $m


12 month Forward PE ratio over time


Temenos: Selling and Marketing expenses over time in $m


Revenue growth trends for Temenos and OFSS (Products segment)

Note: FY corresponds to previous calendar year ending for Temenos

Source: Temenos, OFSS, Spark Capital

20 20 22

38 42 42 43 45

4.9% 5.3% 5.0%

8.1%

9.3% 9.0% 9.2%

8.3%

0%

2%

4%

6%

8%

10%

0

10

20

30

40

50


Development costs As % of Revenues

0

10

20

30

40

50

Jun/0

6

Nov/0

6

Apr/

07

Sep/0

7

Fe

b/0

8

Jul/08

Dec/0

8

May/0

9

Oct/

09

Mar/

10

Aug/1

0

Jan/1

1

Jun/1

1

Nov/1

1

Apr/

12

Sep/1

2

Fe

b/1

3

Jul/13

Dec/1

3

May/1

4

Oct/

14

Mar/

15

Aug/1

5

Jan/1

6

OFSS Temenos

23%

-9%

21%

6%

-5%

4%

0%

5% 8%

-5%

8%

0%

-3%

-3%

3%

-2%

-20%

-10%

0%

10%

20%

30%


Temenos OFSS

75 72 83

133

91 99 92 106

18% 19% 19%

28%

20% 21%

20% 20%

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

140


S&M expenses As % of revenues

CMP

Rs. 203

Target

Rs. 290

Rating

BUY


Deal wins and installations for Intellect continues to grow

Number of deals won during FY 2015

Source: Intellect Design, Spark Capital

Number of deals won during FY 2016


21 22

9

4

56

0

10

20

30

40

50

60

iGCB iGTB iRTM iSEEC Total

24

13 11

1

49

0

10

20

30

40

50

60


Number of customer installations during FY 2015


132 108

53

20

313

0

50

100

150

200

250

300

350


Number of customer installations during FY 2016


158 132

68

16

374

0

50

100

150

200

250

300

350

400


CMP

Rs. 203

Target

Rs. 290

Rating

BUY


Continued Investment in S&M and R&D to drive revenue growth of 20-25%

Selling and Marketing expenses for Intellect in INRm


1,194 1,298 1,581

2,261

24% 24%

26%

28%

20%

22%

24%

26%

28%

30%

-

500

1,000

1,500

2,000

2,500

FY2013 FY2014 FY2015 FY2016

S&M expenses As % of Revenues

Research and Development expenses for Intellect in INRm


License+AMC revenue contribution improving


33% 34%

67% 66%

0%

20%

40%

60%

80%

100%

FY15 FY16

License +AMC Implementation

Revenues : Good balance between emerging and developed nations


America, 14%

Europe, 29%

India, 17%

ROW, 40%

America, 17%

Europe, 30%

India, 15%

ROW, 38%

FY 2016 FY 2015

797 870

1,220 1,292

16% 16%

20%

16%

0%

4%

8%

12%

16%

20%

24%

-

200

400

600

800

1,000

1,200

1,400

FY2013 FY2014 FY2015 FY2016

R&D expenses (INRm) As % of Revenues

CMP

Rs. 203

Target

Rs. 290

Rating

BUY


Rs.mn. FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E

Profit & Loss Cash flows

Revenues 6,048 8,065 10,012 11,947 Cash from operating -176 -1,078 90 845

Software dev. Costs 3,060 3,913 4,606 5,345 Cash from investing -85 -498 -207 -195

Gross profit 2,989 4,152 5,407 6,602 Cash from financing 852 164 30 30

S,G&A costs 2,610 3,403 4,405 4,835 Free cash flow -176 -1,862 -170 585

R&D costs 1,220 1,063 442 464 Key ratios (%)

EBITDA -842 -314 560 1,303 Revenue growth NM 33.3% 24.1% 19.3%

Dep. & Amortisation 194 208 324 415 EBITDA growth NM NM NM NM

EBIT -1,036 -521 235 888 PAT Growth NM NM NM NM

Other income 217 286 53 65 EBITDA margin -13.9% -3.9% 5.6% 10.9%

PBT -812 -259 289 953 EBIT margin -17.1% -6.5% 2.3% 7.4%

Tax 18 -91 58 191 PAT margins -13.7% -2.1% 2.3% 6.4%

PAT -830 -168 231 763 ROE NM NM 3.7% 11.2%

EPS - Diluted -8.2 -1.6 2.2 7.2 ROCE NM NM 7.1% 15.3%

Balance Sheet Valuation metrics

Share capital 501 504 504 504 Shares o/s (mn) 99.7 100.3 101.0 101.0

Reserves & surplus 5,691 5,687 5,917 6,680 Fully diluted shares (mn) 100.7 101.9 105.5 105.5

Total shareholder's equity 6,192 6,190 6,421 7,184 Market cap (Rs. mn) 22,308 22,450 22,595 22,595

Other long term liabilties 120 33 33 33 EV (Rs.mn) 19,723 20,311 22,990 23,107

Total liabilities 6,312 6,224 6,455 7,217 EV/Sales (x) 3.3 2.5 2.3 1.9

Net Fixed Assets 1,905 2,603 2,539 2,384 EV/EBITDA (x) NM NM 41.1 17.7

Goodwill 763 778 778 778 P/E (x) NM NM 102.2 31.0

Other long term assets 1,015 1,263 1,263 1,263 Other ratios (%)

Cash and investments 2,576 846 759 1,440 DSO days 101 73 58 58

Debtors 1,671 1,604 1,591 1,901 NWC days 3 33 41 41

Total current assets 5,924 4,977 5,801 7,464 Book value per share 61.5 60.7 60.9 68.1

Current liabilities & provisions 3,294 3,398 3,927 4,672 Cash per share -1.7 -10.6 0.9 8.0

Total Assets 6,312 6,224 6,455 7,217 FCF per share -1.7 -18.3 -1.6 5.5

Financial summary

Financial Summary

CMP

Rs. 203

Target

Rs. 290

Rating

BUY


Crystal Ball Gazing Chart

INDA to grow

revenue and PAT

by 18% and 100%

in next 3years

from FY17E-

FY20E with

Ebitda moving

from 6% to 20%.

As a result, we

expect company

to generate ROEs

in excess of 26%

by FY20E and

cash conversion

to improve from

negative territory

to 64% of EBITDA

by FY20E.

More product sales

to existing clients

and product sales to

new clients

Consistent

revenue

growth of 18%

Margin

improveme

nt from SI

tie up to

result in

Consistent

growth and

margin

improvement in

business to be

rewarded by

P/E multiple FY20E EPS Price target

18x 25.4 460 ▲

20x 25.4 510

Entry = Rs. 203 @ 1.9x

FY18E EV/Sales

Cumulative Dividends of

Rs. 5

EPS CAGR of 100%, exit

multiple of 18x FY20E

TOTAL RETURN OF

2.3x

FY11 FY15 FY16 FY17E FY18E FY19E FY20E

Revenue NA 6,048 8,065 10,012 11,947 14,229 17,131 ▲

Ebitda NA -842 -314 560 1,303 2,272 3,431 ▲

Margins NA -13.9% -3.9% 5.6% 10.9% 16.0% 20.0% ▲

PAT NA -830 -168 231 763 1,606 2,683 ▲

FY11 FY15 FY16E FY17E FY18E FY19E FY20E

RoE NA NA NA 3.7% 11.2% 20.1% 26.5% ▲

Leverage NA 0.00 0.00 0.00 0.00 0.00 0.00 ◄►

Net Working

Capital days NA 3 33 41 41 42 43 ▲

CFO (Rs m) NA -176 -1078 90 845 1,560 2,360 ▲

Higher Return on

Equity and higher

cash flow from

operations

High multiple

FY11-16E CAGR %

Revenue EBITDA PAT Price

NA NA NA NA

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461


1m 3m 12m

OFSS 2 -1 -7

Sensex 6 6 -2

CNXIT 4 3 2


Market Data

SENSEX 26,813

Nifty 8,220

Bloomberg OFSS IN

Shares o/s 85mn

Market Cap Rs. 294bn

52-wk High-Low Rs. 4,447-3,100


Index member OFSS IN


Promoters 74.3

Institutions 17.6

Public 8.1

Initiating Coverage Oracle Financial Services Software (OFSS), a 75% subsidiary of US listed Oracle Corporation, is India’s most

successful software product company. However, with all its key markets saturating and loss of focus post

acquisition by Oracle in 2005, the proportion of licence fees has fallen from 47% in FY03 to 16% in FY16.

However, a weak INR has provided a floor and held up margins. We see growth stagnating in OFSS’ markets of

Africa and Asia Pac and believe large wins in the US will be difficult to come by. Ever since Oracle Corp.

acquired a majority stake, investors have viewed OFSS as a candidate for delisting. However, with OFSS now

distributing majority of its cash as dividend over the last two years, we don’t see it getting delisted. Currency

depreciation and poor positioning from parent’s point of view (core banking market versus parent trying to

outplay CRM etc) also makes delisting a costly affair. OFSS might be a tactical play in income funds for dividend

due to cash flows rather than growth funds. Initiate with SELL and target price of Rs.3,020 (at 20x FY18 EPS)

Organic revenue growth to remain a challenge

US core banking market is difficult to break through: Despite having a strong parent like Oracle Corp which has a

strong presence in US and OFSS has managed to leverage its parent S&M team, it has failed to make any inroads in

US third party banking software market. The US market is dominated by four players (FIS, FiServ, Jack Henry and

D+H), which together have a 96% market share. We believe the top four vendors have a significant competitive

advantage (they understand the processes and systems of US-based banks better and this significantly reduces the

risks of disruption during implementation). Vendors like OFSS, Infosys and Temenos among others have launched

modular systems to reduce the implementation risk, however this is unlikely to erode the competitive advantage the top

four enjoy. Moreover there aren’t many meaningful large scale US-based implementation references for OFSS.

OBP has not seen much success: In 2012, OFSS’s new platform Oracle Banking Platform (OBP) won two contracts

– Both from Australia (NAB and Sun Corp Bank). After that over the last three years OBP has not seen any new

implementations as per IBS. Established suppliers are seldom the source of new systems as they seem unable to

rewrite their core offerings and innovation has largely come from smaller vendors. This can be attributed to lower

spending on R&D (10%) which is lesser compared to ~15-20% of Temenos, Guidewire, Intellect and Ramco.

Return ratios not that different from an IT services company: Oracle is a product company and arguments for high

multiples for non-linear growth have prevailed for some time now. While it continues to trade at a premium to IT

services companies, a closer look at IT Services peers suggest that on return profile, cash flows and growth, OFSS is

not materially different from a pure play IT services vendor.

Nothing much to cheer about

Financial summary


FY15 39,050 15,507 11,923 141.0 24.3 19.5%

FY16 40,928 16,585 11,655 137.8 24.9 32.7%

FY17E 43,934 19,014 12,402 146.6 23.4 32.6%

FY18E 44,911 19,656 12,801 151.4 22.6 31.4%

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461

OFSS product revenue growth declining for the last 4 years

Source: OFSS , Spark Capital

Temenos license proportion has declined, but moderately

Source: Temenos , Spark Capital

45% 45% 37% 34% 36% 31% 28% 30% 31% 37%

25% 23% 25% 32% 35% 42% 45% 45% 48% 43%

29% 32% 38% 34% 30% 27% 27% 24% 21% 20%

0%

20%

40%

60%

80%

100%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Licensing Maintenance Services

OFSS license proportion has fallen significantly


OFSS’ product revenues registered negative growth rates during the

last four years due to lower growth and maturity in the key markets,

primarily EMEA and Asia Pacific. Together these two regions

contributed ~71% of the product revenues in FY16

For OFSS, the license contribution to the product revenues has

declined from 47% in FY03 to merely 16% in FY16, while competitors

like Temenos were able to contain the decline to moderate levels. This

declining trend gives further clues of maturing market scenario

The tank size (calculated as closing tank size + new licenses signed –

license fees booked) has stagnated and is on a declining trend since

FY09 (refer to chart in next slide)

8%

-5%

8%

0%

-3% -3%

3%

-2%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

0

100

200

300

400

500

600

700


Revenues ($m) % growth

47%

16%

35%

57%

18% 27%

0%

20%

40%

60%

80%

100%

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

License Implementation AMC

Loss of focus, mismatch with Oracle culture and hike in price post oracle acquisition

reflecting in lower license revenue growth

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461

The US core banking software product market is characterized by the presence of few large players who take the bulk of market share (~96% of the market share is from FIS, FiServ, Jack Henry and Davis+Henderson)

For OFSS, it’s hard to overcome the competitive advantage of local vendors. Vendors like OFSS, Infosys, Temenos and others are trying to increase penetration in the US market by launching modular core banking offerings, in an effort to reduce the pain of complete migration, but this does not beat the key competitive advantage of the top 4 US based vendors

We do not feel that OFSS has many options to get a foothold in the US market by acquiring US based players and growing inorganically

Despite being in the home market of parent company, Oracle was not able to make significant inroads into the market

US Market

The African market was initially lucrative for OFSS (contributing to 33% of product revenues in FY03 and 25% average from FY04 to FY09) to sell banking software products, but the competitors were able to dent OFSS’ grip on the market over time.

One of the reasons why OFSS loss market share in Africa was that its parent Oracle Corp was not sufficiently interested in pursuing smaller banks in Africa and also the implementation was shifted to the third party. The high price levels also resulted in further loss of share

From FY13, the African market numbers are reported by clubbing with Europe market. While this restricts our ability to make an inference, our check in the industry suggests that Africa has lagged growth in the recent years

African Market

Higher growth in Asia Pacific (includes Australia) is driven by a number of successes in Australia. We believe OFSS’ largest client is based out of Australia and the product revenue growth has largely been contributed by this client.

Most large Australian banks have recently migrated to a new core banking software and this restricts growth from the Australian market in near to medium term

For China, we note that most of the banks have migrated to a new core banking software in the last decade and hence any more large scale changes may not be on the anvil

Asia Pacific Market

Revenue growth going forward will be challenging

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461

An issue that has become clear over time is that established suppliers are seldom the source of new systems. They seem unable to rewrite their core offerings. Innovation has tended to come from smaller players, often set up by ex-staff of large suppliers. Examples are Frustum (Ex-IMMS), Calypso (Ex-Infinity) and more recently, Trapedza (Ex-Kindle) and TwoFour Systems (Ex-Frustum/Misys). The incumbent suppliers do not seem to have culture of innovation. BIS for instance tried to rewrite in the late 1980s of Midas. IBIs tried to rewrite its system in the second half of 1990s. They also have the complication of existing user bases, from both the perspective of having to satisfy the demands of current customers as well as the challenge of positioning their new development is such a way as to not jeopardise sales of existing applications.

Smaller players like Intellect are better placed than OFSS to innovate new products

The latest to try a rewrite is OFSS with its new platform called Oracle Banking Platform (OBF) with Australia based NAB and Suncorp as its first takers. Atleast OFSS had scale on its side but history and data till date suggest that it will be a difficult task to achieve. Only two vendors have tried to rewrite their code and succeeded. First one is Lebanon based BML Istisharat which rewrote its ICBS system and has a relatively flexible modern solution. The second example is Norway based CBA which has done the same with its IBAS offering, resulting in Java based Object Oriented Solution (OOS). This is one reason why new startup companies like Intellect might win over OFSS. However, even for startups even with experienced founders, there is no guarantee of success though the chances are higher. The only challenge is facing an uphill task not just initially but possibly over time due to having to compete with massed sales and R&D staff of established companies.

Rewriting the systems is difficult to be a success

Oracle acquisition of iFlex was quite notable and was the first instance of a major technology company coming into a core banking space by acquiring its own IPR. The deal had caused major worry among the core systems supplier that had previously viewed Oracle as an independent technology partner. While on the positive side the deal was supposed to bring greater reach and increasing incorporation of Oracle components with Flexcube coupled with reversal on iFlex position on partners whereby it sought to provide all services by itself, over the last 10 years we have only seen OFSS leveraging on S&M and G&A though Oracle’s acquisition but not being able to make any major inroads in the US Geography despite having a strong US based parent. On the flip side, there has been a loss of focus, loss of market share driven by hike in price and watering down of previously strong i-Flex’s culture and drive

OFSS unable to leverage the presence of parent Oracle in US

Product portfolio is impacted by lower investments and inability to alter established

systems

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461

Oracle parentage should help get US entry – a common investor argument

We don’t subscribe to this argument entirely as this does not address how OFSS will beat the key competitive advantage of the top 4 US-based vendors

as highlighted earlier.

OFSS launched its new core banking system, Oracle Banking Platform (OBP), on 18 September 2012 in New York. The company states that OBP is

designed for upper-tier banks looking to manage transformational projects. The new OBP complements the current OFSS FlexCube core banking solution.

The solution targets large banks in key developed markets that have deployed various versions of Computer Sciences Corporation’s Hogan, FIS’

Systematics, legacy or home grown solutions, and to compete with SAP and newer solutions.

We note that Citi is not a reference client in the US as all implementations with Citi are outside of the US. OFSS has one reference client for the OBP

solution based in Australia (National Australia Bank), but the implementation already seen significant cost and time overruns based on media reports

The learnings from implementing in an Australia based bank are unlikely to aid OFSS’ push to win deals in the US. We understand that OFSS has 3 to 4

banking clients in the US; however, these banks are too small to give any comfort on implementation for a large US-based bank. OFSS needs wins and

successful implementations in the US to drive a virtuous win cycle, which given the current competitive dynamics in the US seems challenging. We expect

the revenue share from US to move within a narrow band.

OFSS’ DNA and priorities have changed post the acquisition by Oracle in FY06. The key changes being :

Strong focus on products

Increasing instances of implementation done by third party

Moving away from services

AMC charges now aligned to Oracle standards

These changes have happened as Oracle is more interested in selling licences than services. Points 2 and 3 above have a negative impact on revenue

growth. Moving away from services and implementation reduces the number of revenue streams available for growth

OFSS did not reap any benefits from parent company and priorities changed post

acquisition

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461 OFSS DNA changed post acquisition by Oracle

Sharp cut in S&M and G&A during FY11 and flat there on


Revenues declining in service, EBIT helped by INR & SG&A


-40%

-20%

0%

20%

40%

60%

80%

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

Service revenue growth (%) EBIT margin (%)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

S&M expenses G&A expenses

About 13% of OFSS’ revenues came from IT services in FY16. However, it only accounts for 4% of

EBIT as EBIT margins in the services business is less than half of products business (13% versus

48% in services). We note that services revenues have declined by 6% CAGR in last 10 years in USD

terms (2.4% CAGR decline in INR terms).

Our conversation with industry participants indicates that over the years, the focus on IT services

by OFSS has decreased and management is more interested in the licence revenues in line with

strategy of Oracle Corporation. Even focus on implementing products has reduced and OFSS wants

to get the implementation done by third party.

The mind-set of a product company is very different from a services company and, given the

competition that the services segment is witnessing, it is very tough to hold onto pricing and OFSS

has let go of clients which wanted rate cuts (which in turn has resulted in revenues declining). As

with products, the decline in revenues was compensated by cutting operational costs by leveraging

Oracle’s workforce. Lastly, management remuneration is based on signing of new licences, so focus

is only on products and not services.

FY 04 1,401

FY 05 2,673

FY 06 3,578

FY 07 4,182

FY 08 5,024

FY 09 4,405

FY 10 4,069

FY 11 3,429

FY 12 2,723

FY 13 2,758

FY 14 2,198

FY 15 1,925

FY 16 1,645

Service headcount in FY16 has dropped

to 1/3rd of FY08

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461 Cost advantage of India-based workforce diminishing for OFSS

Gross margins have declined more than Temenos….

Source: OFSS, Spark Capital

….but differential in EBITDA margins have remained


OFSS’ over 40% EBITDA margin over the last 10 years is ~1.5x that of its

competitors abroad like Temenos and Misys. However, on a 10-year

comparison it is quite clear that gross margins of OFSS have declined

from 64% to 61% while that of Temenos has increased from 61% to 71%.

One of the biggest competitive advantages for OFSS was the lower

manpower costs and we believe that this explains the cost-

competitiveness.

There are two components for OFSS’ cost savings: (1) development

costs, the cost of doing R&D in India, and (2) implementation costs, which

are lower as OFSS manages an efficient onsite-offshore model. However,

with time the development cost arbitrage has reduced and competitors

have shifted development work to India. We understand most of

Temenos’ development work also happens out of India.

While EBITDA margins are still ~1.5x that of Temenos, we believe that this differential is due to aggressive cost cutting by OFSS, with most of the Selling

&Marketing expenses having moved over to Oracle

30%

40%

50%

60%

70%

80%

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

OFSS Temenos

0%

10%

20%

30%

40%

50%

60%

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

OFSS Temenos

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461

Significant cut in S&M expenses, leveraging parent’s sales force


Levers to sustain product margins have been utilised in our view

With growth on a declining trend, margins should have headed south. However, OFSS cut its sales and marketing expenses (S&M) by 11% from 21% of

total product revenues in FY06 to 10% in FY16 and general and administration expenses (G&A) by 4% from 6% of total product revenues in FY06 to 3%

FY16 to maintain EBITDA margins at 10 year average of 42%. We believe this is the maximum that OFSS can cut on S&M and G&A and it has utilised all

its margin levers by cutting S&M expenses (with growth on a declining trend) and leveraging its parent’s sales personnel and cut flab in its G&A

G&A expenses has also been cut significantly


0%

5%

10%

15%

20%

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

OFSS Temenos

0%

5%

10%

15%

20%

25%

30%

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

OFSS Temenos

EBITDA margins still at 10 year average


0%

10%

20%

30%

40%

50%

60%

70%


Gross margins EBITDA margins Average EBITDA margin

EBITDA differential has occurred due to sharp cut in overheads


0%

5%

10%

15%

20%

25%


S&M expenses G&A expenses

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461

Spending on S&M and G&A by software product company


Company Last 5 year CAGR

FIS 10.3%

Fiserv 6.9%

OFSS 6.6%

Jack Henry 5.5%

Temenos 2.5%

Last 5 year CAGR in S&M and G&A spend

As can be seen from the charts below, OFSS appears in the bottom half on sales and marketing and general and administrative expenses. This has been

done by leveraging its parent’s (Oracle Corporation) sales force. While its peers like FIS have seen spending on overheads increase by 10% CAGR over

last 5 years, OFSS overhead costs have remained at 6.6%. While it is difficult for us to argue that this is not sustainable, we think this was the key margin

lever in a low growth phase and that has been utilised fully in our view.

Spending on S&M and G&A stood at meagre CAGR 6.6% during last 5 years

0%

10%

20%

30%

40%

50%

FY10 FY11 FY12 FY13 FY14 FY15 FY16

OFSS Temenos Fiserv FIS Jack Henry

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461

OFSS - Tank size (Order book) hasn’t grown much


0

20

40

60

80

100

FY

03

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

OFSS - Growth in new license signings


-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13

FY

14

FY

15

FY

16

Revenue growth by geography


-20%

-10%

0%

10%

20%

30%

FY13 FY14 FY15 FY16

NAMER APAC EMEA

Customer concentration


8% 6% 5% 10% 14% 18% 16% 14% 11%

23% 18% 20%

25% 24%

31% 34% 32% 32%

34%

28% 19%

32% 34%

40% 41% 39% 42%

0%

20%

40%

60%

80%

100%

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Top customer Top 5 customers Top 10 customers

New signings and order book doesn’t indicate any improvement in growth

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461 Valuation Methodology

Oracle is a product company and arguments for high multiples for non-linear growth have prevailed for some time now. But a closer look at IT Services

peers suggest that on return profile, cash flows and growth, OFSS is not materially different from a pure play IT services vendor

As can be seen from the table below OFSS is amongst the most expensive stock to own when compared with peers who have broader services offerings

and high annuity revenues. We have taken consensus estimates for US-based service providers and Temenos. Given that OFSS is a net cash company

with no acquisitions while others have grown via leveraging acquisitions, we have made comparison on EV/Sales, EV/EBITDA and EV/ EBIT. We find that

OFSS have the lowest growth expectations but not the cheapest stock to own when compared to peers. On EV/Sales and EV/EBITDA it’s the 2nd most

expensive stock, and 3rd most expensive on P/E. We thus initiate with a SELL on OFSS.

OFSS is the most expensive stock ,only after Temenos, to own (figures in $m)

FY18/CY17 OFSS Temenos FIServ FIS Jack Henry

Sales 772 668 5,894 9,858 1,433

EBITDA 327 247 2,063 3,114 496

EBIT 320 196 1,749 2,541 367

Market Cap 4,314 4,101 23,514 23,828 6,599

Net Debt -413 20 3,930 8,919 -256

EV 3,901 4,121 27,444 32,747 6,343

EV/Sales 5.70 6.17 4.66 3.32 4.43

P/E 22.60 25.06 21.16 16.65 26.91

EV/EBITDA 13.00 16.69 13.30 10.52 12.78

FCF 261 192 1,245 1,419 259

P/FCF 16.51 21.40 18.89 16.79 25.48

EV/EBIT 16.90 21.03 15.69 12.89 17.31

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461 Financial Summary

Rs in mn FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E


Revenues 39,050 40,928 43,934 44,911 Cash from operating 16,184 7,143 13,955 12,684

Cost of revenues 17,794 18,110 18,293 18,497 Cash from investing 31,682 9,787 -1,004 -1,059

Gross profit 21,255 22,818 25,642 26,414 Cash from financing -46,896 -17,792 -9,720 -9,720

S&M expenses 3,432 3,640 3,984 4,131 Free cash f low 16,057 6,872 14,044 12,773

G&A expenses 2,316 2,592 2,644 2,627 Key ratios (%)

EBITDA 15,507 16,585 19,014 19,656 Revenue grow th 4.4% 4.8% 7.3% 2.2%

Dep. & Amortisation 681 529 554 558 EBITDA grow th 10.8% 7.0% 14.6% 3.4%

EBIT 14,827 16,056 18,460 19,097 PAT Grow th -12.3% -2.2% 6.4% 3.2%

Other income 14,827 16,056 18,460 19,097 EBITDA margin 39.7% 40.5% 43.3% 43.8%

PBT 18,308 18,616 22,853 23,588 EBIT margin 38.0% 39.2% 42.0% 42.5%

Tax -6,385 -6,960 -10,451 -10,787 PAT margins 30.5% 28.5% 28.2% 28.5%

PAT 11,923 11,655 12,402 12,801 ROE 19.5% 32.7% 32.6% 31.4%

EPS - Diluted 141 138 147 151 ROCE 19.1% 31.6% 31.5% 30.4%


Share capital 20,679 29,686 29,686 29,686 Shares o/s (mn) 84.6 84.6 84.6 84.6


Total shareholder's equity 34,440 36,751 39,281 42,209 Market cap (Rs. mn) 2,89,662 2,89,662 2,89,662 2,89,662

Other long term liabilties 1,302 1,336 1,338 1,340 EV (Rs.mn) 2,54,023 2,62,354 2,58,030 2,54,977

Total liabilities 28,265 20,016 20,206 20,418 EV/Sales (x) 6.5 6.4 5.9 5.7

Net Fixed Assets 3,027 2,652 2,008 1,361 EV/EBITDA (x) 16.4 15.8 13.6 13.0

Goodw ill 6,087 6,087 6,087 6,087 P/E (x) 24.3 24.9 23.4 22.6

Other long term assets 9,899 9,798 9,154 8,507 Other ratios (%)

Cash and investments 35,639 27,307 31,631 34,684 DSO days 60 64 62 56

Debtors 6,014 8,259 6,766 6,916 NWC days 433 186 198 221

Total current assets 46,720 40,885 44,248 48,037 Book value per share 407 435 464 499

Current liabilities & provisions 27,184 18,679 18,867 19,078 Cash per share 421 323 374 410

Total Assets 62,706 56,770 59,489 62,630 FCF per share 190 81 166 151

OFSS Target

Rs.3,020

Rating

SELL

CMP

Rs.3,461 Crystal Ball Gazing Chart

OFSS revenues

and PAT to

grow by 4% and

5% CAGR in

next 4 years

from FY16 -20E

. Ebitda margins

likely to

improve to

~45% in FY20E

from ~40% in

FY16

Moderate revenue

growth due to

markets stagnating

in Africa and APAC,

and difficulty to win

deals in US

Revenue

growth of c4%

Marginal

increase

in EBITDA

margins

would

result in

Moderate

growth and

almost stable

margins would

drive

P/E multiple FY20E EPS Price target

18x 166 2,992

20x 166 3,324 ▲

Entry = Rs. 3,461@ 23x FY18E P/E


Rs.415

Exit multiple of 20x FY20E

EPS

TOTAL RETURN OF

1.1x


Revenue 29,969 39,050 40,928 43,934 44,911 46,483 48,342 ▲

Ebitda 10,281 15,507 16,585 19,014 19,656 20,569 21,634 ▲

Margins 35.8% 39.7% 40.5% 43.3% 43.8% 44.3% 44.8% ▲

PAT 7,736 11,923 11,655 12,402 12,801 13,380 14,057 ▲


RoE 22.9% 19.5% 32.7% 32.6% 31.4% 30.4% 29.4% ▼

Leverage 0.01 0.04 0.04 0.03 0.03 0.03 0.03 ◄►

DSO 126 64 62 56 55 55 60 ◄►

CFO (Rs in m) 7,367 16,184 7,143 13,955 12,684 13,344 14,013 ▲

Lower Return on

Equity and moderate

growth in cash flow

from operations

Lower multiple

FY11-16 CAGR %


8 10 8.5 10

Trading History – % of times stock traded

PE range <15x 15x-17x 17x-19x 19x-21x >21x

9 11 32 33 15

Majesco India TP

Rs.720

RATING

BUY

CMP

Rs.543


1m 3m 12m

MJCO -2 -6 NA

Sensex 6 6 -2

CNXIT 4 3 2


Market Data

SENSEX 26,813

Nifty 8,220

Bloomberg MJCO IN

Shares o/s 23mn

Market Cap Rs. 13bn



Index member MJCO


Promoters 49.9

Institutions 16.1

Public 34.0

Initiating Coverage Majesco Limited (MJCO), is a third party Insurance software provider from Indian mainly operating in the US

Property and Casualty segment. Its core portfolio offering in the US P&C segment is thanks to its acquisition of

STG International in 2008. The good thing that Mastek did that time was despite adverse performance of the

company, it did not cut down on the R&D spending in STG and they seems to be reaping the benefits now with

strong order book and revenue growth. The opportunity in the market is $9bn (excluding hardware) with largest

player Guidewire holding only 4% market share (10% including its SI Partners revenues), the space is open for

Majesco to gain share. The insurance companies in US are modernising their systems by investing in

technology and Majesco is well placed to capture this trend and expectation is that this momentum of

modernising their systems might continue. Integration of the acquisition which is expected to be done by the

QIP money remains the biggest risk with Majesco. Initiate with BUY and target price of Rs720.

Strong order book driving revenue growth

Opportunity size is huge, order book position gives comfort on revenue visibility: Majesco is currently operating

in a market whose size is $9bn in which the largest player, Guidewire, is capturing 10% market share, if revenues from

its SI partners are included. Though Majesco’s offering doesn’t figures in the Gartner's leaders quadrant, it is the

number 3 player in the US P&C segment and sale of Accenture’s Duck Creek to Apax Partners might help Majesco to

fill the gap and move up if the capital raised via QIP is used in making acquisitions to plug front end weaknesses. With

strong order booking of $158m in FY16, the revenue momentum should continue in FY17 and a growing market should

ensure that revenue momentum continues in FY18.

Accenture selling Duck Creek can be a blessing in disguise: One way of looking at the sale of Duck Creek to Apax

Partner is whether Accenture was finding it difficult to scale it up. Another way is to see this as an opportunity for

Majesco. Duck Creek has expensive professional services fees. It saw limited success with SIs partly because leading

SIs have been reluctant to engage with a competitor and the SIs that have not had time to develop Accenture-level

implementation capabilities. Buyers have also been sceptical about Duck Creek’s Policy module ability to scale to meet

Tier 1 insurers' needs, and its Claims module is often viewed as too complex and costly for Tier 3s. Majesco doesn’t

comes with these baggage and with its cloud offering new deal wins and eventual scale up will be easy.

Acquisition and its successful integration is the biggest risk: Post the QIP, Majesco intends to use the capital to fill

portfolio gaps through acquisition. This is the biggest risk in our view and the risks includes risk of overpaying but

importantly risk of cultural and operational integration as not all acquisition can be a cultural fit as STG was.

Decent offering in a growing market

Financial summary


FY15 4,936 20 -100 -4.4 NM NM

FY16 7,572 99 69 2.8 114.1 2.5%

FY17E 8,965 347 186 8.1 66.3 6.5%

FY18E 10,570 712 332 14.5 37.0 10.7%

Majesco India TP

Rs.720

RATING

BUY

CMP

Rs.543

Majesco Ltd, India

Majesco, USA

Coverall System Inc., USA

Majesco Software and Solutions INC., USA

Majesco Software and Solutions India Pvt Ltd,

India

Majesco UK Limited, UK

Majesco Canada Ltd, Canada

Majesco SDN.BHD.Malaysia

Majesco (Thailand) Co. Ltd, Thailand

Majesco Asia Pacific PTE. Ltd, Singapore

70.1%

100% 100% 100% 100%

100%

100%

100%

100%

Corporate Structure

Entity listed in the

NYSE

Source: Majesco

Majesco India TP

Rs.720

RATING

BUY

CMP

Rs.543

Company Description:

Established in 1982, Mastek is one of the oldest IT companies in India with niche focus in Insurance, Government and financial services sector. As of

FY15, the company had revenues of US$ 164 mn with operating margins of 1.8%.

On Sept.2014, Mastek announced vertical demerger of its insurance product and service business into Minefields Computer Private Limited (to be

renamed as Majesco Limited) with mirror shareholding. Majesco (the insurance arm) also announced merger of Cover All Technologies limited with a

step down subsidiary of Majesco (Majesco US) for an 100% stock- to- stock transaction in which Cover-All would own 16.5%. This entity got listed in

NYSE on June 2015 and currently has a market cap of ~ US$ 173 mn. Notably, Majesco US - the US listed entity has three shareholders – Majesco

(70.1%), Mastek UK (13.8%) and Cover-All shareholders (16.5%).

Majesco offers an integrated portfolio of IT products & services, comprised of proprietary software solutions, IT consulting and Traditional IT services.

Primarily catering to Property & Casualty (P&C) and Life, Annuities & Pensions (L&A) verticals of Insurance, Majesco provides core software solutions,

i.e. solutions to manage Policy Admin, Claims management and billing functions. Notably, Policy Admin is the largest driver of revenues for IT product

companies. As of FY16, Majesco had revenues of US$ 115.5 mn (includes US$ 17.6mn from Coverall Tech) and EBIT margins of -1%. Majesco has

products in primarily in the P&C and L&A segments of Insurance.

Business Overview

Majesco has developed insurance business through five acquisitions

Source: Majesco IM, Spark Capital

Announced Target Company Target Company Description Deal Value (US$ mn)

Dec-2014 Cover-All

Technologies, Inc.

US-based company engaged in the provision of solutions to the property and casualty insurance

Industry 33

Dec-2014 Agile Technologies,

Inc. US-based company engaged in providing IT consulting services to the insurance industry 9*

Dec-2010 SEG Software, LLC US based company that develops policy administration software for individual and group

life, health and annuity insurance products Not Disclosed

Mar-2008 Systems Task Group

International Ltd US based company providing enterprise wide solutions to the US P&C insurance industry. 29*

Jul-2007 Vector Insurance

Services

US based technology solutions provider and third party administrator that focuses on the North

American life and annuity insurance industry 9*

Majesco India TP

Rs.720

RATING

BUY

CMP

Rs.543

Revenues by Geography (FY 2016)

Source: Majesco, Spark Capital

Revenues by line of business (FY 2016)


Revenues by nature of business (FY 2016)


Majesco – Revenue classification

UK, 8%

Others, 5%

2% 7%

78% North America,

87%

Non insurance

L&A

P&C

8% 18% 14%

39%

79%

19%

2%

21%

0%

20%

40%

60%

80%

100%

Lic

ense

Clo

ud

Support

On-P

rem

ise

Imple

menta

tio

n

To

tal

Insura

nce

Non-I

nsura

nce

To

tal

Product revenues Services

76%

18%

7%

79%

18%

3%

Property & Casualty Life & Annuities Non-Insurance

FY 2015 FY 2016

Revenue distribution by client


8.7% 10.2%

30.9% 26.5%

46.3% 40.7%

0%

20%

40%

60%

80%

100%

FY15 FY16

Top 10 Clients

Top 5 Clients

Top Client

Majesco India TP

Rs.720

RATING

BUY

CMP

Rs.543 Products portfolio – An overview

Life, Annuity Pension and Retirement

Elixir North America Policy Administration System

Elixir Distribution Management

New Business & Underwriting

Implementation Services

STG Policy Administration

Insurance Customers by Tier

Source: Majesco IM, Spark Capital

• Majesco is an IP centric business model and offers core systems

across all lines of business in P&C and L&A. Prime Products owned by

Majesco are STG Policy, STG Billing, STG Claims, Elixir Policy Admin

and Elixir Underwriting management. Majesco also provides all its

products in a SaaS model

• Property & Casualty Insurance is a strong segment for Majesco

growing at an organic CAGR of >25% in the last two years. P&C

segment have been gaining traction with demand in Policy Admin and

Billing Solutions. Coverall is known for its BI product. Integration of both

services should better traction

• Life & Annuity Segment has been tepid for the last two years led by

tepid UK market. Majesco has been trying to cross sell its L&A products

in US. We believe this segment would continue to remain sluggish in

the near term

• Key clients: Unum (UK), CNA, Erie Insurance, One Beacon, Society

Insurance, Fairfax, Secura, GMAC Insurance, Heritage, AssureStart,

Nodak Mutual Insurance Company, Tokio Marine Nichido

Property and Casualty/General Insurance

STG Policy Administration

STG Billing

STG Product Modeler

STG Claims

Distribution Management

Implementation Services

23 56

42 24

21

9 17

27

FY14 FY16

<$100M

<$100M to <$1B

$1B to <$5B

>$5B

Majesco India TP

Rs.720

RATING

BUY

CMP

Rs.543 Growth opportunity and addressable market in US P&C segment

Description $bn

US insurance market premium 1,259

IT expense @ 3.5% of premium 44

Staffing expenses @ 40% 18

Others (external IT) @ 60% 26

Market Opportunity = External IT expenses @60% of total IT exp 26

Hardware (Desktops, Laptops, Networks etc) @18% 7.9

New software’s @12% 5.3

Maintenance & Support @ 15% 6.6

External services @ 15% 6.6

Majesco market @ 42% of IT expenses 18.5

Addressable market size @ 50% 9.3

The addressable market size of $9bn for

Majesco in Insurance segment is similar to

that of Intellect’s addressable market size of

$8bn in Banking segment. Majesco can

improve its positioning via acquisition and

move from being a Visionary to the

Leadership quadrant

The $1.3Trn is the written down premium of

the US P&C segment and on an average US

P&C companies spends roughly 3.5% of

their revenues on IT of which translates to a

total market of $44bn of which only 60% can

be addressed by Majesco as it deals with IT

other than staffing

In the $18.5bn of the market which Majesco

can address, there are 2,000 US P&C

carriers. Majesco cannot address all of them

as the smaller ones may not add much

value. Hence it has identified 600 carriers to

whom it intends to reach out to and tracks it

on day to day basis. This $18.5bn is the IT

spending of these 600 P&C carriers.

Majesco India TP

Rs.720

RATING

BUY

CMP

Rs.543

Majesco - Insurance customers by tier

Source: Majesco

Majesco – Property & Casualty customer grouping by solution

Source: Majesco

9

21

24

23

17

27

49

64

>$5B

>$1B to <$5B

>$100M to <$1B

<$100M

FY14 FY16 Direct

Written Premium

Policy

Billing Claims

35

0

18

3

35

1

2

Majesco – Enabling Insurance value chain across all lines of business

Source: Majesco

Digital Data Cloud

Services

Partner Ecosystem

Consulting

Breadth of Solutions Across All Lines of Business

Dep

th o

f S

olu

tio

n

Majesco suite of offerings largely covers entire insurance value chain

Majesco India TP

Rs.720

RATING

BUY

CMP

Rs.543 Majesco can improve its positioning via acquisition and move into Leader quadrant

Worldwide Policy Administrative Systems* 2015 Vendor Assessment

Source: IDC, * includes P&C and Life & Annuity

Magic Quadrant for Life Insurance PAS, North America

Source: Gartner, February 2016

LEADERS CHALLENGERS


Infosys McCamish

EXL

InsPro Technologies

FAST Technology

Vitech Systems Group Mphasis Wyde

CSC (Wealth Management)

Sapiens

Andesa Services Majesco

MDI CSC (CyberLife)

Concentrix

Accenture

Oracle

AB

ILIT

Y T

O E

XE

CU

TIE


Magic Quadrant for P&C Insurance PAS, North America

Source: Gartner, January 2015

LEADERS CHALLENGERS


OneShield Instec

Majesco

Accenture

Guidewire

AB

ILIT

Y T

O E

XE

CU

TIE


Participants

Contenders

Major Players

Leaders

STRATEGIES

CA

PA

BIL

ITIE

S

Guidewire

Accenture

Fadata Oracle

StoneRiver SunGard EXL

Majesco

CSC

Sapiens

Magic quadrant for P&C Insurance Claim Management Module

Source: Gartner, June 2015

LEADERS CHALLENGERS


CSC

Accenture

Guidewire

AB

ILIT

Y T

O E

XE

CU

TIE


Insuresoft Keylane

Innovation Group

SAP

Majesco

Majesco India TP

Rs.720

RATING

BUY

CMP

Rs.543

Revenue distribution trends ($mn)


73 75

110

9 4

3

0

20

40

60

80

100

120

FY 2014 FY 2015 FY 2016

Insurance Non Insurance

Financials at a glance

Revenue and EBITDA margin trends


23.2

28.2 29.6

32.3 5.2%

0.2%

-3.7%

1.3%

-6%

-4%

-2%

0%

2%

4%

6%

0

5

10

15

20

25

30

35

Q1 16 Q2 16 Q3 16 Q4 16

Revenue ($m) Adj EBITDA (%)

R&D expenses in FY 2016


3.2

4.2 4.2 4.6

13.6%

15.0% 14.3% 14.3%

12%

13%

14%

15%

16%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Q1 16 Q2 16 Q3 16 Q4 16

R&D spend % of Revenue

SG&A expenses in FY 2016


7.6

9.5

10.6 10.5

32.8% 33.7%

35.8%

32.6%

31%

32%

33%

34%

35%

36%

37%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Q1 16 Q2 16 Q3 16 Q4 16

SG&A spend % of Revenue

Majesco India TP

Rs.720

RATING

BUY

CMP

Rs.543

Guidewire (Insurance) revenue trends ($m)


60 74 97 124 152 179

19 21

30 38

42 50

66 77

105

140

156 151

0

50

100

150

200

250

300

350

400

2010 2011 2012 2013 2014 2015

License Maintenance Services

Licence 5 year CAGR 24%

Maintenance 5 year CAGR 21%

Services 5 year CAGR 18%

Temenos (Banking) revenue trends ($m)


160 146 125 143 148 199

155 197 202 212 223

234

133 130 123

113 98

109

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015

License Manitenance Services

Licence 5 year CAGR 4% ; Maintenance 5 year CAGR 9%

Services 5 year CAGR -4%

If the market remains buoyant , the scale up in revenues can be big and quick

Majesco revenue by offerings– FY 2016


License, 8%

Professional services, 60%

Cloud, 18%

Support, 14%

Majesco has recently launched Majesco CloudInsurer which provides a

business platform appealing to broad range of insurers including start

ups, greenfields, incubators to mid-market and tier one insurers. The

cloud platform includes

Core insurance software platform

Digital Multi channel platform

Data driven analytics

Robust ready to use content

Majesco partner ecosystem

Extensive implementation and post productive services

Majesco India TP

Rs.720

RATING

BUY

CMP

Rs.543 Valuation methodology

USDm FY16 FY17 FY18 Stake EV/Sales Valuation

Total Revenues

115

138

163

India Business

2

2

3

100%

2.5

7

US

113

136

160

Services

24

25

26

70%

1.0

18

Products

89

111

134

70%

2.5

234

Total Enterprise Value ($ mn) 260

USD/INR 65

Rs in million

Total Enterprise Value (Rs mn)

16,883

Net Cash -

353

Market Cap

16,530

Market Price per share 720

Current Market Price per share 543

Upside 33%

There are two parts to Majesco’s business.

The smaller part is India business, in

which Indian entity holds 100% and the

second part is US business, in which the

entity holds 70%. Hence, the valuation is

based on 100% of India’s revenues and

70% of US revenues. Within the US

revenues, the services component which

is currently about 21% of total revenues is

expected to decline to 16% due to high

growth in product segment. Ascribing a

single EV/sales multiple to total revenues

would have meant ascribing similar

multiples to product business as well as

service business, which is not appropriate

in our view. Hence we have ascribed

EV/sales multiple of 1x to service portion

of revenues and EV/sales multiple of 2.5x

to the product revenues. EV/sales multiple

of 2.5x for the product business is similar

to what we have ascribed to Intellect

Design. We arrive at a EV of $260m and

after converting into INR m , we reduce it

by net cash to arrive at INR 720/share

Majesco India TP

Rs.720

RATING

BUY

CMP

Rs.543

Rs.mn FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E


Revenues 4,936 7,572 8,965 10,570 Cash from operating 198 99 347 712

Employee costs 3,547 5,056 5,222 5,417 Cash from investing -690 -398 -233 -239

Gross profit 1,389 2,516 3,744 5,152 Cash from financing 266 66 -113 -110

Other expenses 1,369 2,417 3,397 4,440 Free cash flow -240 -563 -105 87

EBITDA 20 99 347 712 Key ratios (%)

Dep. & Amortisation 176 179 75 140 Revenue grow th NM 53.4% 18.4% 17.9%

EBIT -156 -79 272 572 EBITDA grow th NM 407.3% 249.9% 105.3%

Other income 78 91 87 81 PAT Grow th NM LP 169.3% 79.0%

PBT -187 -77 315 614 EBITDA margin 0.4% 1.3% 3.9% 6.7%

Tax 79 -150 79 153 EBIT margin -3.2% -1.0% 3.0% 5.4%

PAT -100 69 186 332 PAT margins -2.0% 0.9% 2.1% 3.1%

Dil EPS. bef. Extraordinary -0.2 4.7 8.1 14.5 ROE NM 2.5% 6.5% 10.7%

EPS - Diluted -4.4 2.8 8.1 14.5 ROCE NM 0.3% 8.9% 15.1%


Share capital 113 115 115 115 Shares o/s (mn) 22.5 22.9 22.9 22.9


Total shareholder's equity 2,702 2,759 2,945 3,277 Market cap (Rs. mn) 12,108 12,286 12,301 12,301

Long term borrow ings 191 459 409 359 EV (Rs.mn) 11,459 12,052 12,130 12,002

Other long term liabilities 224 530 530 530 EV/Sales (x) 2.3 1.6 1.4 1.1

Total liabilities 3,465 4,471 4,657 5,067 EV/EBITDA (x) NM 122 35 17

Net f ixed assets 2,292 669 914 1,094 P/E (x) NM 114.1 66.3 37.0

Other long term assets 114 522 522 522 Other data

Cash and investments 931 1,152 1,020 1,078 Majesco US rev (US$ mn) 79.3$ 113.3$ 133.3$ 157.9$

Debtors 507 1,520 1,703 2,080 Standalone revs (US$ mn) 1.0$ 2.2$ 4.6$ 4.7$

Total current assets 1,950 3,632 3,733 4,366 Book value per share 119.8 113.2 128.6 143.1

Current liabilities & provisions 892 2,277 2,437 2,840 Cash per share 41.3 47.3 44.5 47.1

Total Assets 3,465 4,471 4,657 5,067 FCF per share -10.6 -23.1 -4.6 3.8

Financial Summary

Majesco India

Crystal Ball Gazing Chart

Majesco

revenues and

PAT to grow by

17% and 72%

CAGR in next 4

years from FY16

-20E . Ebitda

margins likely

to improve to

9.5% in FY20E

from 1.3% in FY

16%

Strong revenue

growth driven by

good opportunity

size and order book

position

Strong

revenue

growth of

~17%

Improved

EBITDA

margins will

result in

Consistent

growth and

improved

margins would

drive

EV/Sales Price target

2.2x 772

2.5x 872 ▲

Entry = Rs. 537@ 1.1x

FY18E EV/sales


Rs.0

Exit multiple of 32x FY20E

EPS

TOTAL RETURN OF

1.6x


Revenue NM 4,936 7,572 8,965 10,570 12,314 14,161 ▲

Ebitda NM 20 99 347 712 1,053 1,346 ▲

Margins NM 0.4% 1.3% 3.9% 6.7% 8.6% 9.5% ▲

PAT NM -100 69 186 332 463 602 ▲


RoE NM NM 2.5% 6.5% 10.7% 14.1% 18.4% ▲

Leverage NM 0.1 0.5 0.4 0.3 0.3 0.2 ▼

DSO NM 67 49 66 65 69 73 ▲

CFO (Rs in m) NM 198 99 347 712 1,053 1,346 ▲

Higher ROE and

increased cash flow

from operations

Higher multiple

FY11-16 CAGR %


NA NA NA NA

Ramco Systems Fair value

Rs.780

CMP

Rs.704


1m 3m 12m

RMCS -2 -1 5

Sensex 6 6 -2

CNXIT 4 3 2

Update Date June 22, 2016

Market Data

SENSEX 26,813

Nifty 8,220

Bloomberg PSYS IN

Shares o/s 30mn

Market Cap Rs. 21bn



Index member RMCS


Promoters 56.0

Institutions 25.4

Public 18.6

Company Update Ramco systems, part of $1b Ramco Group of Companies is a rapidly growing Enterprise Software Product player

catering to the domain of ERP, M&E MRO for Aviation and HCM. The stock price is up 8x in the last 3 years post

restructuring and appointment of Virender Aggarwal as CEO in 2012. With ~60-70% of HCM bookings and ~40-50% of

ERP bookings on cloud, the revenue growth for Ramco will be driven by steady subscription based revenues, unless

Ramco is able to break through a major on-premise deal, for example in fixed wings space in Aviation sector. With the

worldwide SaaS market expected to grow at CAGR 18.2% for FY15-20e and Indian SaaS market to grow 3x by FY20e

from $407m in FY16e, we expect Ramco to continue its revenue growth momentum in the future as companies embrace

Saas based subscriptions. While Ramco was able to deliver decent EBITDA margins of ~20% in the past 2 years, going

forward, the margins will be primarily driven by the improvement in top line growth and rationalization of operating

expenses.

Growth driven by ERP and HCM segments while Aviation will likely be flat

HCM: HCM business has continued to grow impressively at 63% in FY16 post 114% in FY 15, contributing to 27% of

revenues in FY16. The growth in this segment is driven by pay roll suite, with more than 350 global customers spread

across 108 countries. Ramco is the largest payroll provider in India and after venturing into China and Australia with

cloud based offerings, the company is trying to make inroads into U.S market with an eye to cross sell the products to

the Aero clientele, and has to deal with strong players like Workday, Success factors etc. We expect Ramco to continue

growth in this segment with the strong brand name and uptick in adoption of HCM cloud products by SMEs. Our

conversations with Industry analysts indicates strength in Ramco’s HCM offering and given that most of the larger

players are still focussed on developed markets, Ramco can tap and grow rapidly in the Asia Pacific market.

ERP: The ERP segment is the largest contributor, with 45% of group revenues and grew 14% in FY16 post 17% in

FY15. The growth in future will be driven by picking up of logistics segment which is seeing investments in back end

due to strong growth of ecommerce segment. The logistics software has gained sufficient traction within three months

of launch. With good growth prospects of ecommerce industry fuelling the growth in logistics segment, the end to end

logistics software suite provided by Ramco is well placed to capture the market and grab first mover advantage. With

the Global ERP industry set to reach $42bn by FY20e at a CAGR of 7% and an increased adoption of the ERP

products primarily from APAC and Middle east, we expect the ERP business to continue as the largest contributor to

group revenues.

Aviation: The aviation segment has declined by 7% in FY16 and contributed to 28% of the total revenues. Ramco’s

aviation suite is primarily focussed on materials, maintenance and repair solutions catering to a market opportunity of

$4bn. Unlike ERP and HCM segments, the cloud based bookings for Ramco in aviation segment is only c10-15%. The

majority of the revenues have already been captured from the Malaysian Airlines deal and the company recognizes

only AMC revenues going forward. Also, with the bleak scenario in Heli segment, owing to less demand of Helicopters

in oil industry due to low crude prices, the revenue prospects for Ramco in Aviation segment does not look great

unless the company is able to crack any major deal in the fixed wings space. Considering this scenario, we expect the

revenue growth in Aviation segment to be flat going forward. Recovery in oil price can revive deal momentum.

Cloud adoption to drive growth


Rs.780

CMP

Rs.704

Ramco had a strong growth of 16% in FY16 post 33% in FY15 after

years of tepid growth primarily led by restructuring efforts from 2012

Source: Company, Spark Capital

Description:

Established in 1999, Ramco Systems (RMCS) is a part of US$1 billion

diversified conglomerate, Ramco Group of Companies. In 2012, after

Mr.Virender Aggrawal joined as CEO, the company underwent a gamut

of changes, from its traditional roots of being a core ERP player.

RMCS has three Strategic business units (SBU) operating around three

major project offerings – Aviation, HCM and ERP. Each SBU functions

as a fully integrated unit taking complete ownership from R&D, pre

sales, marketing, implementation and support.

All the three product suites can be hosted in the cloud and have strong

reference points in India, S.E.Asia, Middle East and Australia.

Under Aviation, RMCS primarily caters to MRO* companies. In HCM*,

RMCS has a strong payroll product and in ERP*, the company is known

for its Services, Staffing and Facility management ERP.

Timeline – Key events

Source: Company, Spark Capital Research

Incorporated

in 1999

Launch of ERP on

Demand 2.0

“ERP on Rent” Saas

– band offering

Launch of on demand Analytics & Gateway on

Cloud

Launch Saas ERP for Aviation Manufacturing

Virender Aggrawal joined as CEO

Launches ERP on Cloud for Australia

Aviation on cloud from Helipad operators

Ramco HCM on Cloud goes global

10 Aviation deals won in FY13

Entry into wearable technology

Announced right issue @ Rs.155/ share

Raised Rs. 325 crores via QIP with

Rs.668/share as floor price

Global payroll on cloud

Launched China Cloud payroll software

1999 2010 2011 2014 2012 2013 2015

Company Description

* MRO – Maintenance repair & operations, HCM – Human capital management, ERP – Enterprise resource planning

35.4 44.8 46.3 43.9 43.8

59.4 68.9

22% 20%

9%

-1%

10%

20% 21%

-5%

0%

5%

10%

15%

20%

25%

0

10

20

30

40

50

60

70

80

FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16

Revenues (USDm) EBITDA margins


Rs.780

CMP

Rs.704

Revenue by service lines (FY16)


Revenue by products (FY16)


Revenue by geography (FY16)


Revenue profile

30%

19%

50%

1%

License

Recurring

Services

Resale of material

18%

4%

29% 26%

17%

6%

America

Europe

APAC

India

MEA & North Africa

South Africa

45%

27%

28%

ERP

HCM

Aviation

Revenues ($m) and EBITDA margin trends


48.6 44.5 43.8 59.4 68.9

9.6%

-0.7%

10.0%

20.0% 21.8%

-5%

0%

5%

10%

15%

20%

25%

0

10

20

30

40

50

60

70

80

FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Revenues EBITDA margin


Rs.780

CMP

Rs.704

Ramco Aviation Suite: Materials Management & Maintenance are areas where Ramco has strong presence, while Human Capital Management

would be key focus area going ahead


Ramco Aviation Software

The Aviation software used in Materials management and MRO is similar to that of an internal software used by an auto OEM for example. Akin to

the way the software of an auto OEM triggers when the service is due, the aviation software helps in identifying the different requirements of the

various components used in Helicopters / Air planes

Our View : The aviation segment has declined by 7% in FY16 and contributed to 28% of the total revenues. With the majority of the revenues already

been captured from the Malaysian Airlines deal, combined with the bleak scenario in Heli segment, we expect the revenue growth in Aviation segment

to be flat going forward. Recovery in oil price can revive deal momentum.


Rs.780

CMP

Rs.704

HCM Suite: Payroll is the strongest product of Ramco among the HCM suite


HCM on Cloud

Ramco has more than 200+ clients in HCM out of which 170+ are based out of India. It’s cloud payroll supports 110+ clients. Along with payroll cloud

offering, RMCS also offers managed payroll services and MPRHO services. In 2015, RMCS has forayed into China and Australia. With an integrated

Global Payroll on Cloud for 35+ countries along with IRIS (RMCS Integration services) which aids seamless integration across all other on premise &

cloud databases, Ramco HCM has become very popular among MNCs and global conglomerates.

We expect Ramco to continue growth in this segment with the strong brand name and uptick in adoption of HCM cloud products by SMEs


Rs.780

CMP

Rs.704 HCM on Cloud – 80% of the clients are in India and the offering is best in India

Product Excellence Matrix – HCM Software Products by Indian Vendors

ST

RA

TE

GI

C

EX

CE

LL

EN

CE

E X E C U T I O N E X C E L L E N C E

Full fledged HCM software Functional-specific HCM software

Dark Horses Exemplars

Achievers Scouts

Adrenalin

(Adrenalin esystems Ltd.)

Ramco HCM

(Ramco Systems Ltd) EmpXtrack

(Saigun Technologies Pvt Ltd

EmployWise

(Global Groupware Solutions Ltd)

Greytip Online

(Greytip Software Pvt Ltd

Recruitment Solution

(eSoft Consulting Ltd)

EazeHR

(EaseWork (Mobius Solutions Pvt Ltd)

IbharCPM

(Ibhar Technologies Pvt Ltd

HumaNET

(BlueChip Computer

Consultant P Ltd)

KServeHRMS

(Kallos Solutions Pvt Ltd

The key clientele in HCM for

Ramco Systems include Dabur,

Red Tag, KPMG, RadissonBLU,

Lifestyle, Omega Healthcare ,

Seagate, Bata etc

Sector Outlook

POSITIVE


Indian Enterprise Software Product companies

Source: Nasscom, sample size is 213

Enterprise Software Industry – Growth driven by increased adoption by SMEs and availability of SaaS

based products

Classification of Indian Enterprise Software Products

Source: Nasscom, sample size is 213

Global Enterprise Software Market *($bn)

Source: Nasscom, * ERP,CRM,SCM,HCM

70

85

0

20

40

60

80

100

2013 2016

An increase in awareness of enterprise software

products and adoption by Small and Medium

Enterprise Businesses has provided market entry and

growth opportunities for Indian Software Product

Vendors, although companies like SAP, Oracle and

Microsoft stood tall in the space

The adoption of ERP by SMEs was made possible

with emergence of SaaS based models

In the ERP segment, vendors are trying to provide

vertically integrated offerings, while HCM, SCM and

business software segments are directed towards

addressing niche end-user business challenges

Customer management,

29%

ERP software, 23%

Business productivity software,

21%

HCM software,

14%

SCM software,

13%

Nearly 30% of the

software product

companies are

incorporated before

2010 and ~26% of the

firms are based out of

Bengaluru

Before 2010, 29%

2010, 11%

2011, 7%

2012, 15%

2013, 38%

India, 62%

Global, 38%

Year of Incorporation Market focus

The global ERP

software market size is

expected to reach

$42bn by 2020, while

HRM sofware market

size is estimated to be

$9.2bn by 2022 and

CRM software market

size is expected to

reach $36.5bn in 2017

from $23bn in 2014

Page 61

Sector Outlook

POSITIVE


PEM: Product Excellence ERP for Indian Software Product Vendors

Applane Education

(Daffodil Software Ltd)

Exactly ERP

(La Exactly Software Pvt. Ltd.)

IBS ERP

(KVN Software (Pvt) Ltd.)

PlumERP

(Plumsoft)

GEMS – Governing Education Management System

(Juno Software Systems)

FusionRetail

(Rance Computer Pvt. Ltd

Insta HMS

(Insta Health Solutions Pvt. Ltd

Ramco ERP on Cloud

(Ramco Systems Ltd.)

Fedena

(Foradian Technologies)

KenCloud ERP

(SWASH Convergence Technologies Ltd.)

FARVISION

(Gamut Infosystems Ltd.) CLEAR for Broadcast

(Prime Focus Technologies )

aceTM

(Entlogics Technologies Pvt Ltd)

ST

RA

TE

GI

C

EX

CE

LL

EN

CE

E X E C U T I O N E X C E L L E N C E

PARAS

(Shristi Software

Applications Pvt. Ltd)

Cross-vertical software Vertical-specific software

Dark Horses Exemplars

Achievers Scouts

Among Indian Vendors, Ramco Systems stands out

Page 62

The key clientele in ERP

for Ramco Systems

include Schneider Electric,

TVS, ITC Ltd, Vedanta,

Caterpillar, Mother Dairy,

DLF India, TAFE, Pricol etc


Rs.780

CMP

Rs.704

ERP on cloud: Ramco’s differentiating proposition is the industry it operates – Services, Staffing and Facility management

Source: Company, Spark Capital Research

ERP on Cloud

Ramco ERP system has 800+ customers and is spread across 35+ countries largely based out of Middle East and APAC. Ramco has strong

positioning in staffing, facility management and services organization by serving the leading players in the market. Recently, RMCS launched logistics

ERP on cloud for Australia and New zealand

Our View :The logistics software has gained sufficient traction within three months of launch. With good growth prospects of ecommerce industry

fuelling the growth in logistics segment, the end to end logistics software suite provided by Ramco is well placed to capture the market and grab first

mover advantage. With the Global ERP industry set to reach $42bn by FY20e at a CAGR of 7% and an increased adoption of the ERP products

primarily from APAC and Middle east, we expect the ERP business to continue as the largest contributor to group revenues.


Rs.780

CMP

Rs.704 ERP on Cloud

Rs.mn FY15 FY16 FY17E FY18E FY15 FY16 FY17E FY18E


Revenues 3,605 4,477 5,684 7,304 Cash from operating 219 214 1,324 1,173

Other Operating Income 48 67 30 28 Cash from investing -440 -620 -570 -520

Total revenues 3,653 4,544 5,714 7,332 Cash from financing 239 803 -200 -41

Employee costs 1,620 1,886 2,668 3,712 Free cash flow -228 -406 754 653

Other Operating Expenses 1,313 1,683 1,793 1,972 Key ratios (%)

EBITDA 720 975 1,254 1,649 Revenue grow th 37.0% 24.2% 27.0% 28.5%

Depreciation 449 462 432 446 EBITDA grow th NM 35.3% 28.6% 31.5%

EBIT 271 513 821 1,202 PAT Grow th -153.3% 209.2% 102.2% 51.0%

Interest exp/ (income) 120 36 -15 -59 EBITDA margin 20.0% 21.8% 22.1% 22.6%

Tax 24 89 42 63 EBIT margin 7.5% 11.5% 14.5% 16.5%

PAT 127 392 792 1,196 PAT margins 3.5% 8.8% 13.9% 16.4%

Diluted EPS 5.8 13.0 26.0 39.2 ROE 7.0% 9.0% 12.0% 15.7%

Balance sheet ROCE 12.8% 13.6% 17.4% 20.2%

Share capital 244 300 300 300 Valuation metrics

Reserves & surplus 2,283 5,920 6,713 7,909 Shares o/s (mn) 21.2 28.9 29.4 29.4

Total shareholder's equity 2,528 6,221 7,013 8,209 Fully diluted shares (mn) 21.9 30.2 30.5 30.5

Long term borrow ings 2,184 0 211 211 Market cap (Rs. mn) 15,429 21,233 21,483 21,483

Other long term liabilities 123 198 200 202 Adjusted EBITDA* 115 375 704 1,149

Current liabilities 1,689 1,255 1,397 1,800 EV (Rs.mn) 18,966 24,094 21,783 20,967

Short term borrow ings 540 0 -100 -200 EV/Sales (x) 5.2 5.3 3.8 2.9

OCL 1,149 1,255 1,497 2,000 EV/EBITDA (x) 26.3 24.7 17.4 12.7

Total liabilities 6,524 7,674 8,821 10,422 P/E (x) 121.8 54.2 27.1 18.0

Net Fixed Assets 2,740 2,733 2,823 2,897 Other ratios (%)

Goodw ill 995 995 995 995 DSO days 116 109 102 98

Cash and cash equivalents 109 74 628 1,239 Book value per share 115 206 230 269

Debtors 2,379 3,029 3,531 4,446 Cash per share 5.0 2.4 20.6 40.6

Total assets 6,524 7,674 8,821 10,422 FCF per share -10.4 -13.5 24.7 21.4

Financial summary

Sector Outlook

POSITIVE


Disclaimer

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Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective

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Absolute

Rating

Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year

horizon

ADD Stock expected to provide positive returns of >5% – <15% over a 1-year

horizon SELL Stock expected to fall >10% over a 1-year horizon

Sector Outlook

POSITIVE


Disclaimer (Cont’d)

Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,

Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Disclosure of interest statement Yes/No

Analyst financial interest in the company No

Group/directors ownership of the subject company covered No

Investment banking relationship with the company covered No

Spark Capital’s ownership/any other financial interest in the company covered No

Associates of Spark Capital’s ownership more than 1% in the company covered No

Any other material conflict of interest at the time of publishing the research report No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:

Managing/co-managing public offering of securities

Investment banking/merchant banking/brokerage services

products or services other than those above

in connection with research report

No

Whether Research Analyst has served as an officer, director or employee of the subject company covered No

Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No

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