Mastek rides on buybacks, restructuring
Shares of Mastek continued their bullish run and the past one-year returns stand at nearly 150%
In mid-September, Mastek Ltd said it will demerge its insurance services business into another company called Minefields Computers Pvt. Ltd. If investors were worried about unseen hazards ahead, it didn’t show. On the contrary, the company’s shares continued their bullish run. Its past one-year returns stand at nearly 150%.
This is remarkable, to say the least, for a company whose revenue and profit (pre-tax and pre-exceptionals) have declined by 5% and 25%, respectively on a year-on-year basis for the past four quarters. Mastek’s management has achieved this by utilizing its cash well through generous buybacks, and later by demerging its insurance services business.
The value-unlocking story got a further boost this week, after the company announced that the demerged business will, in turn, be merged with a US-listed company, Cover-All Technologies Inc. Cover-All, also a provider of insurance software services, is only about a fourth the size of Mastek’s insurance unit, which will eventually be called Majesco. It’ll help Majesco scale up from an annual revenue run rate of about $80 million to around $100 million, a level it would anyway have reached in about a year’s time.
The most attractive part of the deal, it appears, has nothing to do with operational or financial synergies. One of the key expectations (in fact, it’s an explicit condition for the merger to go through), is that the merged entity’s shares will be approved for listing on the NYSE MKT, a small-cap exchange platform.
Not just that, if the combined entity continues to trade at the valuations Cover-All currently enjoys, it could result in windfall gains for Mastek shareholders. Cover-All trades at about 1.7 times annual revenues, which will value Majesco at around $136 million, or ₹ 850 crore. Mastek’s entire market capitalization, even after the 150% gain in the past year, stands at ₹ 599 crore. It must be noted here that Majesco accounts for 55% of Mastek’s revenues. The remaining business—although it has been volatile in the past—is far from being worthless.
Will the merged entity’s valuations converge with those of Cover-All’s current valuation? If this happens, it will be akin to the proverbial tail wagging the dog, considering that Cover-All’s shareholders will hold only 16.5% of the merged entity’s shares. Even so, Majesco’s shareholders will be corporate entities controlled by Mastek, thanks to which public float may be limited and price discovery may be shaky. The upshot may well be a handsome valuation for Mastek’s insurance services business. The moot question, really, is if the valuation, thus derived, should be meaningfully relied upon.
In sum, it’s a bit disconcerting that Mastek’s valuation has risen by as much at a time when its financial performance has deteriorated.
The writer does not have any positions in the companies mentioned here.
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