9am with Emkay |
Contents
Tech M: Veil off Satyam’s FY09, FY10 results, however important questions still remain unanswered…
No big surprises in results
Satyam has reported revenues of US$ 1.16 bn for FY10, EBITDA margins of 8.3% and profits of Rs 2.9 bn (ex one off items). Reported revenues are in line with the range that co had been indicating to investors/analysts (US$ 1-1.2bn) with margins <10% (Emkay est of 9.6%). Co has disclosed that it had 45k employees for FY09 and ~27k in FY10. We believe that co has done a credible job in terms of restatement of accounts and has achieved cost controls in FY10 as it has tried to set the house in order.
Active number of clients at 350, however very little disclosure on operating metrics
Co indicated that it had an active client base of ~350 clients during FY10 (V/s ~500 in FY09) with co seeing new client additions of 44. Co cited examples of seeing new client wins across all the predominant markets (including wins from financial services customers in US, Germany and a financial regulator in Asia Pac zone, UID project in India)
Despite disclosures with respect to full year financials, we are disappointed with
n no disclosure on operating metrics (apart from the employee numbers, active client numbers),
n no flavor on business outlook (no indications from co management on quarterly run rates , our rough cut calculations suggest Q4 exit run rates of ~US$ 240 mn). We believe quarterly revenues/EBITDA trajectory assumes more importance in case of Satyam given that it would have seen client exits/project rampdowns throughout FY10( confirmed from the comments of co mgmt- remember we have seen revenues from clients who were ramping down in FY10, so these revenues will not be there in FY11)’
We believe that Satyam faces an uphill revenue recovery road (co management itself indicated that they have a 3 year transformation roadmap) despite the recovery in the overall macro environment given the relatively weaker positioning from loss of key personnel/client exits etc post the fiasco( despite senior inductions post Tech M’s takeover)
On a rough cut basis, believe that FY11 will see –ive growth despite industry recovery
Despite significant recovery in the overall demand environment which is benefiting Satyam’s peers, we believe that Satyam faces an uphill task to revenue recovery (albeit disclosure of financials puts it in a better position to bid for larger deals) and even after assuming an optimistic 5% CQGR throughout FY11, revenues in FY11 would be lower than FY10 revenues (we model in revenues at US$ 1,090 mn, -6% YoY). Further the improvement in industry’s prospects has led to increased employee attrition across the industry (evident from attrition moving up sharply in the recent quarters) and we understand from our channel checks that Satyam had to hike salaries by ~25-30% in Jan’10 which should limit margin recovery ahead despite benefits from increase in utilization, reduction in overhead costs etc
Estimate earnings of Rs 5.3/Rs 7 for FY11E/FY12E, actions shifts to Nov 15’10
Even after building in decent recovery in revenue growth, benefits of operating leverage (from increase in utilization, reduction in overhead costs) , we estimate earnings of Rs 5.3/Rs 7 for FY11/12 respectively (assuming exchange rates of Rs 46/45 and a 15%/24% tax rate assumption for FY11/12 respectively). Further any possible progress on merger of the two entities Satyam and Tech M moves to Nov 15’10 when Satyam discloses it’s H1FY11 financials which should help us understand the revenue and margin trajectory for Satyam going ahead. (a clear check on our rough cut assumptions)
After the sharp 20%+ move for both Tech M and Satyam over the past 1 month, we see risks to the downside given expensive valuations at ~19x/14x FY11E/12E earnings, 4.7x/3.5x P/B on FY11E/FY12E basis for Satyam. We clearly see disappointment to street’s exuberant expectations in the run up to Satyam’s results and expect both Satyam and Tech M (~42.7% stake in Satyam) to react negatively.
We have a HOLD rating on Tech M with a price target of Rs 720.
Tata Motors Management Meet Update; JLR to drive the performance, Maintain ACCUMULATE; Target: Rs 1,235
n Strong demand outlook for FY11/FY12, driven by LCVs. JLR continues to suffer with engine shortage. No major pre buying is visible in M&HCVs. Nano’s order backlog is almost over
n Domestic business to witness cost pressures. JLR margins are sustainable but for currency fluctuations. Price hike due to emission norms is not yet decided
n We believe that momentum in M&HCV to peak out, expect concerns for FY12 volumes to set in 3Q/4QFY11. However JLR to more than compensate for downside risk in M&HCVs
n Upgrading FY11/FY12 EPS estimates by 10%/13% to Rs 110.6/Rs 137.8 due to upgrade in JLR est. Raise our SOTP based TP to Rs 1235 (up by 8%), maintain ACCUMULATE
n Technical Comments
Dull day
It was a depressing close for the market as Nifty closed below its psychological mark of 6000. Moreover, Nifty has formed an outside bar with a negative bias, which is a worrisome signal for the market. However, unless 5932 is not broken the bullish trend remains intact due to the fact that the series of rising troughs is still not violated. Hence we still maintain our buy on dips stance for the target of 6250.
BSE Auto
BSE Auto index is showing weaker indicator reading on every subsequent upper Bollinger band tags, which is a warning signal. Hence we recommend boarding the Auto index on minor dip rather than boarding it at the current levels.
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