Kotak Sec recommends: SELL Mahindra Satyam target Rs 80

Lots more to do. We reinitiate coverage on Mahindra Satyam with a REDUCE rating
and end-FY2012E, DCF-based target price of Rs80. Satyam faces multiple challenges,
including operating with a reduced addressable market, lack of competitive
differentiation, loss of quality client base, reduced management bandwidth and high
attrition. The new management has done a creditable job in holding the organization
together, but we believe a meaningful turnaround is some time away.


Reinitiating coverage with a REDUCE rating; TP Rs80 and FY2012E EPS of Rs5.4
We reinitiate coverage on Mahindra Satyam (Satyam) with a reduce rating and end-FY2012E DCFbased
target price of Rs80. Our target price implies a 15X P/E multiple on FY2012E financials. Note
that we adjust our target price for any liability that may arise from the class action suit against the
company. We forecast revenues of US$1,098 mn and US$1,344 mn for FY2011E and FY2012E;
we believe that delivering revenue growth in line with the industry will be challenging. Satyam has
done a creditable job in driving cost alignment with revenues; however, the next phase of margin
expansion can only be driven through aggressive revenue growth. We forecast EBITDA margin of
14.2% and 15.4%, translating into EPS of Rs5 and Rs5.4 for FY2011E and FY2012E, respectively.
Satyam discloses audited financial information for FY2009 and FY2010
Key highlights from the audited financials released by MS includes (1) revenues of Rs54.8 bn for
FY2010; (2) EBITDA margin of 8.3%; (3) net loss of Rs1.2 bn after including extraordinary item of
Rs4.2 bn. Extraordinary items pertained to severance compensation for employees (Rs0.9 bn),
forensic investigation expenses (Rs1.1 bn) and write down in value of assets of subsidiaries (Rs2.2
bn), (4) cash and cash equivalent of Rs22 bn at end-March 2010, which would reduce to Rs19 bn
after payout of Upaid dispute (5) accumulated losses of Rs27.5 bn; management has not clarified
whether tax shield will be available on it. However, the company did not share (1) some critical
information on FY2010 revenue and margin exit rate or (2) details on any operational metrics.
Significant challenges ahead—reduced addressable market; non-differentiated positioning etc
We believe Satyam has significant challenges to contend with, including (1) loss of competitiveness
and scale in several verticals and horizontals; (2) loss of high-quality client base—US$800 mn
revenue loss from 150 clients implies revenues of US$5 mn lost per customer. As compared to this,
revenue per client from existing operations stands at US$3.3 mn (3) loss of entire management
team of Satyam and other key employee exits; in fact, we understand that only four members of
the 42 key members of the senior team of Satyam are still with the company; and (4) significantly
reduced addressable market; the company has lost large clients and quality logos in some of its
core areas of competence.