Mahindra Satyam is due to declare audited results for FY09 and FY10 on 29th
September implying that the company has cleared some of the key issues that
has dogged it in the past and is ready to move on. The single biggest gain of
announcement of results is that the obstacle of clients not dealing with a
vendor with unknown financials is removed and clients could now begin to
engage with Mahindra Satyam post the results event.
Given the stretched time period since the last financials came out in Apr-2009
(unaudited), we present a sensitivity analysis to compute the fair value per
share for this company, based on a few key assumptions:
• Employee count is our starting point - Company had indicated in Apr-2010
that it had ~28,000 employees. We work with a base-case of 30,000. Based
on reasonable billing rate assumptions of ~USD55 per hour per person
(onsite) and ~USD20 per hour per person (offshore), which represents a 20-
25% discount to Infosys' billing rate (both onsite and offshore) – this headcount
assumption implies an annualized (current) revenue run-rate in the
range of US$1.2-1.3Bn for Mahindra Satyam.
• People costs and utilization – we are assuming people costs to be largely
in-line with top-tier names with overall company utilization rate of ~75%.
• Using per employee EBIT as a reality check. Infosys’ per employee EBIT
is about USD 13,400 (for FY10). Our computed per capita EBIT for Satyam
works out to ~USD 6,700 per employee (50% discount to Infosys). We note
that this is comparable to peers like Patni. At EBIT of USD 6,700 per
employee, Mahindra Satyam’s operating (EBIT) margins work out to be
about 15%, not a modest assumption given that most mid-tiers operate
below this benchmark (HCLT's most recent quarterly EBIT margins were
also lower than 15%).
• Operating leverage of Mahindra Satyam is likely given possibility of
revenue pickup. We see this playing out in FY11/FY12 reflected in EBIT
growing ahead of revenues.
• Interest income of 6% on cash - we assume that cash remains at Rs35Bn
based on Rs29Bn cash infusion by Tech Mahindra and minimal cash
generation from Mahindra Satyam in FY11.
• Based on these assumptions we arrive at Net income in the range of Rs 8.5-
9.0 Bn and EPS in range of Rs7.2 - 7.6 for FY11. We also note that tax rates
will increase by 5-6% in FY12 as STPI benefits expire, so even a 20% EBIT
growth will only translate to ~10-15% EPS growth for FY12 (suggesting a
range of Rs8.2 – 8.8 for FY12). Applying a multiple of 14x (one-year
forward) on top of a 20% revenue growth in FY12 (a strong
assumption) would give fair value in the range of Rs110-120. Our
ascribed multiple of 14x on FY12 earnings matches our fair multiple for
HCLT (closest comparable to Mahindra Satyam) and represents a
meaningful premium to the mid-tier valuations.
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