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Small-cap IT player Mastek on Monday announced the demerger of its insurance products and services business into a new company called Majesco. Under the demerger scheme, Mastek shareholders will get one equity share of Majesco for every equity share held in Mastek, the company said at a press conference here on Monday. The new entity, Majesco, is proposed to be listed on the BSE and the National Stock Exchange.
“There will be a separate board for the two companies and the two entities will be sister-concern companies. In Majesco, it will make sense to have a more insurance-specialist board, which can help the business,” said Ketan Mehta, CEO of Mastek (North America). “So those who come with insurance background at Mastek will come to Majesco. After the High Court order, all this will fall in place,” he added.
The demerger scheme will be subject to the approval of the high courts of Bombay and Gujarat; the appointed date for the demerger is April 1, 2014, while that for the offshore insurance transfer is November 1. The Mastek board-approved separation of insurance products and solutions businesses already have strong roadmaps in place.
Majesco, which will look into the insurance and products business, and Mastek, which will focus on the solutions business, are planning to grow by acquiring companies, mainly in the UK.
“With this demerger, there will be a very focused approach towards acquisitions. It is hard to put a timeline as of now, but we are currently looking at the US and the UK for an acquisition,” said Mehta.
He will be heading Majesco once the demerger takes shape in the next financial year, following various statutory approvals.
Sudhakar Ram, the company’s managing director and group CEO, who will eventually head Mastek’s solutions business, said: “We also looking at inorganic growth to get back to the size we were of, and we are planning an acquisition mainly in the UK. However, nothing is imminent as of now,” he said.
As on March 31, Mastek’s cash on books was Rs 170 crore, of which Rs 40 crore would be given to the solution entity, with the balance going towards the insurance business.
“When looking for acquisition, we (Majesco) are looking for a couple of things. One is, we should get additional capabilities and intellectual property to complete our portfolio, obviously additional customers but more importantly, additional talent is something we will look for as we are only in the insurance segment and so, domain knowledge becomes very critical for us,” said Mehta.
In terms of hiring, the Majesco entity will have a slightly different strategy from Mastek.
“Because skills needed in Majesco will largely be insurance-driven and product development experience, the general purpose hiring may not happen there (at Majesco),” said Ram.
“As far as hiring in Mastek (solutions business) is concerned, one does not hire ahead of the curve; so we will hire depending on the business,” he said.
As on March 31, Mastek’s consolidated revenue stood at Rs 923 crore with the insurance business contributing Rs 507 crore and solutions churning Rs 416 crore.
“We (Mastek solutions business) will have a $70-75 million (Rs 420-450 crore) business, so how we cross the $100-million (Rs 600-crore) mark will be the first milestone upon demerger. Due to this, for revenues we are targeting other government orders, BFSI (banking, financial services, and insurance), healthcare and retail verticals for solutions.
At Mastek’s solutions business, of the total revenues, 95 per cent will come from the UK business with 60-65 per cent coming from the UK government.
Although solutions is a higher margin business compared to insurance where fixed costs are huge, Ram said company size may become a challenge going ahead. “One of the challenges we (solutions business) may face is that we are not a large company, though we are specialised and niche. So from a customer’s and employee’s perspective, the size could be a challenge. However, the reputation and track record we have should help us overcome this hurdle. Being small, we are also agile so that is also one way which can help us penetrate markets deeper,” he said.
At Majesco, since the demerger will integrate the entire global insurance business under one umbrella, the new entity plans to focus on opportunities in the UK, Asia-Pacific region and the US.
“Currently, for Mastek’s insurance business, less than 15 percent revenue comes from outside the US. However, the company’s competitor has more than 40 per cent revenue coming from outside of US. It means, Majesco has opportunities to grow,” said Mehta.
Majesco also plans to have an enhanced sales team for this purpose. It will also invest in its intellectual property, if need be.
“Talking about it on a more thematic basis than company-specific, such a move fine tunes a company’s focus rather than have a broad brush approach,” said Sanjoy Sen, senior director at Deloitte. “Such a demerger can help the new entities hire specific talents or leaderships that can help the entity bring in more focus to the business,” he added.
