Tech Mahindra
Sell: What Will Satyam’s Financials Look Like?
Focus back on Satyam's financials — Satyam reports FY09/10 financials on 29
Sep – the focus is back on they will look and what they might imply for FY11/12
numbers. In this note, we look at a possible scenario and what it implies in terms
of Satyam/TechM’s valuation multiples. Interestingly, Satyam’s market cap now is
~$2.8bn, which is higher than pre-event market cap of ~$2.5bn.
Rough simulation suggests Satyam trades at ~14x FY12E — Our simulation
(assuming $1.3bn revenues and 19% EBITDA margins for FY12) implies Satyam
trades at ~14x FY12E. Margin remains the tough call but it’s difficult to believe
that Satyam’s FY12 margins could be higher than 19% given: (a) the recent
history, and (b) the supply side situation in the sector. Lower margins could imply
that valuations are even more expensive than ~14x FY12E.
Key assumptions for the analysis — (a) Revenues of $1.1bn, $1.2bn, $1.3bn in
FY10/11/12 respectively, (b) EBITDA margins of 13%, 17%, 19% for FY10/11/12,
(c) Net cash and debt – Satyam’s disclosures as of Mar 09 and then cash
generation at 45% of EBIT every year, (d) Currency, tax rates – largely in line with
our sector assumptions. Details are in Table 1.
What does it mean for TechM? — The above assumptions imply that TechM trades
at ~10.7x FY11E and ~9.4x FY12E consolidated EPS (consolidating 42.7% of
Satyam’s profits). Valuations are not very high but rightly so in our view, as the
outlook on TechM’s core business remains weak. We continue to prefer HCL Tech.
However, near term TechM could see some strength due to: (1) Cross currencies
(GBP/EUR) in its favor now, (2) Low base effect, (3) ~1,600 employees were on
the bench in BPO and are expected to become billable in Q2.
What could drive the stocks up? — (a) Margin outlook better than our assumption
of 19% for FY12, (b) More positive (than expected) commentary on future outlook
(c) Any merger announcement – merger ratio becomes important in that case.
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