Religare recommends Mahindra Satyam: target Rs 135

Disclosure of accounts a near-term event, remain positive
from a medium-term view, BUY 
Satyam Computer Services (SCS) has seen a sharp rally of 15% this week in the
run up to its disclosure of re-stated numbers for FY09 and FY10 on
29 September 2010. While details of the announcement are unclear (whether it
will disclose quarterly numbers or only annual numbers for FY09/10), we
believe that the key for SCS’ investment case is the most recent run-rate (both
in terms of revenues and operating margins). In our view, playing the near-term
event is difficult and we would not advise taking a strong position on the same.
On a fundamental basis, we remain positive on SCS especially with our view of
an imminent merger with Tech Mahindra (TechM) that will create one of the
top 5 Indian IT companies with revenues of over US$ 2bn. We maintain our
BUY from a medium term view and a price target of Rs 135/sh.
Disclosure of FY09/FY10 financials on 29 September: The Mahindra Satyam
board is to meet on 29 September to adopt results for FY09 and FY10. In our
view, only disclosure of financials for these two years will not reflect the correct
picture of the current state of the business. We believe that the business at SCS
has improved considerably from its lows of 2009 and we expect improving exit
rates through the Mar-10 and Jun-10 quarters. Further, the re-statement will be
followed by a series of investor days by TechM–SCS in the UK and US in
October ’10.
Tech Mahindra – Satyam merger imminent: With the business at SCS stabilising
and post the disclosure of the accounts a SCS–TechM merger looks imminent. In
our view, SCS has one of the most diversified IT services practices among the
Indian tier-II companies and a merger would create the 5th largest Indian IT
company with revenues of over US$ 2bn. While the manner in which the merger
will be structured remains an open question, we believe that merger of TechM
into SCS would be a logical option given better business and client mix at SCS
and the US listing will continue to provide visibility with large US-based clients.
Investment view: We believe that the recent run up of 15% and uptick from
Rs 90 to Rs 105 over the last week is largely event driven. While it is difficult to
call the near-term event, we remain positive from a medium-term perspective.
Further, we expect SCS to see sharp improvement in profitability leading to EPS
of Rs 8/Rs 11 in FY11E/FY12E backed by cost management and utilization
improvement. As such, we believe that valuations are reasonable at FY11E/FY12E
P/E of 14x/10x and maintain our BUY.