Mahindra Satyam

Rating: Target price: EPS:

Strong results, downgrade to ADD on the back of stock price rally

CMP Rs. 89

Target Rs. 95

Rating ADD

1QFY13 Results Update Date Market Data SENSEX Nifty Bloomberg Shares o/s Market Cap 52-wk High-Low 3m Avg. Daily Vol Index member 17164 5207 SCS IN 1,177mn Rs. 105bn Rs. 92-58 Rs. 244mn Aug 03, 2012

Mahindra Satyam (MSAT) reported US$ revenue growth of 2.9%, EBITDA margin expanding 418bps qoq with forex depreciation accounting for 300bps and earnings growing 10% sequentially. Deal pipeline has improved sequentially, whereas delay in decision making continues. Manufacturing would continue to be growth driver in our view. On a constant currency basis MSAT margin are in the 17% - 18% range and expect this margin level to sustain in FY13E and FY14E. Over the last 3 months MSAT has rallied 16% and resultantly upside to our target price stands reduced. Downgrade to ADD with a price target of Rs. 95. Organic revenue growth of 2.4%: Revenue included integration of Vcustomer for ~45 days and accounted for US$ 2mn of revenues. Revenue growth was led by manufacturing (up 9.5% qoq) and Healthcare (up 20% qoq) and in geographies US grew 9.5% qoq while Europe declined 5.6% qoq. Management commentary indicated that pricing remained stable with volume driving revenue growth. Headcount addition continues to be strong with organic addition of 1,200 (predominantly freshers). Stellar Margins: EBITDA Margins have been on increasing trend for the last six quarters (up 15.3ppts) with rupee depreciation for ~660bps. We believe the operation margin expansion have been on the back of steady focus on improving fresher mix (currently at 33.7%), reducing attrition and leverage on overheads. We believe margins would remain stable on a constant currency basis as the benefits from improving employee pyramid would be gradual from here on. Further with merger with Tech Mahindra around the corner, we expect scale led synergies to benefit margins over the next 18 months. Earnings have stabilised: We believe MSATs earnings have stabilised and expect performance to be more predictable, further boosted by stepped up disclosure. With most tax assets being written off taxes would increase and dampen earnings growth in FY13E (FY13E tax rate of 26% vs 6.2% in FY12) Downgrade to ADD: We remain positive on the merger story and Tech Mahindra and Mahindra Satyam, however recent rally in stock price reduces upside to our price target, thereby driving a downgrade. We value MSAT by reckoning the swap ration with Tech Mahindra, whereas Tech Mahindra price target by attaching a 10x multiple on Dec-13E proforma EPS of Rs. 80. Our target multiple is 15% discount to our HCL Tech P/E of 12x.
Financial summary Year FY12 FY13E FY14E Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x)

Latest shareholding (%) Promoters Institutions Public 42.6 29.3 28.0

Stock performance (%) 1m MSAT Sensex CNXIT 10 -1 -7 3m 16 0 -8 12m 14 -4 -9

63,956 72,945 77,061

10,240 13,535 13,640

10,290 10,491 11,429

8.7 8.9 9.7

10.2 10.0 9.2

8.0 6.0 6.0

Srivathsan Ramachandran, CFA srivathsan@sparkcapital.in +91 44 4344 0039

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Mahindra Satyam
Quarterly Financial Results
Consolidated financial results Rs. mn\Period Revenue (US$) Revenue (INR) Employee cost Operating and admin costs EBITDA Depreciation EBIT Other Income Interest and Financing Charges Exceptional Items PBT Tax PAT Minority Interest PAT after Minorty EPS - Diluted EBITDA margin % EBIT margin Tax rate PAT margin % Jun-12 342 18,799 11,078 3,646 4,075 494 3,581 670 31 0 4,889 1,326 3563 40 3,523 2.6 21.7% 19.1% 27.1% 19.0% Jun-11 320 14,339 9,301 2,938 2,100 380 1,720 1,009 45 0 2,683 426 2257 2,257 1.9 14.6% 12.0% 15.9% 15.7% 703bps 706bps 1126bps 321bps 56.1% 82.2% 211.7% 57.8% yoy Growth 6.9% 31.1% 19.1% 24.1% 94.1% 29.8% 108.3% -33.6% -31.1% Mar-12 332 16,658 10,204 3,539 2,915 415 2,500 727 25 -1,094 4,295 -943 5238 (104) 5,342 2.2 17.5% 15.0% -21.9% 31.4% -34.1% 20.1% 418bps 404bps nm -1249bps 13.8% -240.7% -32.0% qoq Growth 2.9% 12.9% 8.6% 3.0% 39.8% 18.9% 43.3% -7.8% 23.3%

CMP Rs. 89

Target Rs. 95

Rating ADD

FY12 1,307 63,956 39,436 14,280 10,240 1,577 8,663 4,189 118 -1,094 13,828 851 12977 (84) 13,061 8.7 16.0% 13.5% 6.2% 20.3%

FY13E 1,425 72,945 44,481 14,929 13,535 1,993 11,542 2,904 125 0 15,599 4,128 11471 40 11,431 8.9 18.6% 15.8% 26.5% 15.7%

yoy Growth 9.0% 14.1% 12.8% 4.5% 32.2% 26.4% 33.2% -30.7% 5.8% 12.8% 384.8% -11.6% -147.7% -12.5% 2.0% 254bps 228bps 2031bps -456bps

Mahindra Satyam
Business Overview
Key estimate revision FY13E Old
Revenues US$ mn USD/INR rate Revenues - INR mn EBITDA Margin % EPS 1,425 49.0 69,814 13,097 18.8% 8.9

CMP Rs. 89

Target Rs. 95

Rating ADD

US$ Revenue progression FY14E Change

0% 4% 4% 3% -20bps 0%
350

New
1,425 51.2 72,945 13,535 18.6% 8.9

Old
1,576 48.0 75,654 14,336 18.9% 10.2

New
1,573 49.0 77,061 13,640 17.7% 9.7

Change
0% 2% 2% -5% -125bps -5%
275 325

300

250 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

All figures in Rs. mn, except EPS, which is in Rs.

Source: Company Data / Spark Capital

EBITDA margin progression

24% 20% 16% 12% 8% 4% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

MSAT 12-m forward P/E

30 25 20 70% 60% 50% 40% 30% 20% 10% 0%

P/E

15 10 5 0

Sep-10

Nov-10

Sep-11

Nov-11

Jan-10

Jan-11

Jan-12

Jul-10

Jul-11

May-10

May-11

1yr fwd P/E

Source: Bloomberg / Spark Capital

Avg P/E

Discount to Infy

Source: Source: Company Data / Spark Capital

May-12

Mar-10

Mar-11

Mar-12

Jul-12

Mahindra Satyam
Financial Summary
Abridged Financial Statem ents Rs. m n Revenues Employee Cost EBITDA Depreciation EBIT Other Income Interest and Financing Charges Exceptional Items PBT Tax PAT Minority Interest PAT after Minorty and exceptionals EPS - Basic EPS - Diluted Balance sheet Share Capital Loan Funds Deferred Tax Liability Total - Sources of funds Fixed assets incl CWIP Investments Sundry Debtors Cash and Bank Balances Net current assets Total - Application of funds 2,353 315 68 59,134 9,499 4,348 11,588 27,538 16,242 59,134 2,354 3,201 15 12,304 45,543 10,095 2,168 14,018 29,140 31,584 45,543 2,354 3,201 15 12,304 57,013 10,252 2,168 15,988 40,088 42,855 56,970 2,354 3,201 15 12,304 68,580 10,419 2,168 16,890 51,312 54,227 68,510 FY11 51,450 35,943 4,551 1,847 2,704 2,942 97 6,411 -862 578 -1,440 33 4,938 4.2 4.2 FY12 63,956 39,436 14,280 10,240 1,577 8,663 4,189 118 -1,094 13,828 851 12,977 -84 10,290 8.7 8.7 FY13E 72,945 44,481 14,929 13,535 1,993 11,542 2,904 125 0 15,599 4,128 11,471 40 10,491 8.9 8.9 FY14E 77,061 47,741 15,680 13,640 2,033 11,608 3,757 125 0 15,422 3,856 11,567 0 11,429 9.7 9.7 Cashflow Net cash from operations Net cash from investing Net cash from financing Free cash flow Cash at year-end Grow th Revenues EBITDA PAT EPS Margins EBITDA PAT Return ROE ROCE Valuation Fully diluted shares (mn) Market cap (Rs. mn) EV (Rs.mn) EV/Sales (x) EV/EBITDA (x) P/E (x) EPS(E) / Current market price Revenue per employee (000's) EBITDA per employee (000's) PAT per employee (000's) Key m etrics

CMP Rs. 89

Target Rs. 95

Rating ADD

FY11 -611 2,401 -204 -3,153 5,055 -6.1% -18.1% nm nm 8.8% nm -3.2% 20.2% 1,178 105,039 81,532 1.6 17.9 21.3 4.7% 1,758 156 169

FY12 -3,375 939 0 -6,625 25,102 24.3% 125.0% 108.4% 68.9% 16.0% 20.4% 34.3% 30.3% 1,178 105,039 81,532 1.3 8.0 10.2 9.8% 2,043 327 329

FY13E 10,318 754 -125 8,168 40,088 14.1% 32.2% 2.0% 108.4% 18.6% 15.7% 32.1% 27.4% 1,178 105,039 81,532 1.1 6.0 10.0 10.0% 2,244 416 323

FY14E 9,793 1,557 -125 7,593 51,312 5.6% 0.8% 8.9% 2.0% 17.7% 15.0% 24.6% 22.9% 1,178 105,039 81,532 1.1 6.0 9.2 10.9% 2,337 414 347

Operating and Administration Expenses 10,956

Amounts Pending Investigation Suspense12,304 Account

Mahindra Satyam

CMP Rs. 89

Target Rs. 95

Rating ADD

Rating Interpretation

Recommendation History Date CMP Target price Rating

Buy

Stock expected to provide positive returns of >15% over a 1-year horizon

11-Jun-12
Add Stock expected to provide positive returns of >5% <15% over a 1-year horizon

78 70 70 69 69

95 90 85 90 90

Buy Buy Buy Buy Buy

18-May-12 16-Mar-12 2-Mar-12

Reduce

Stock expected to provide returns of <5% -10% over a 1-year horizon

Sell

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

27-Feb-12

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