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Tech Mahindra Limited
Satyam Dec-10 results show signs of revenue growth; Merger overhang remains
Quick Comment: Satyam’s Dec-10 results: Satyam
reported US$ revenue growth of 4.3% qoq in a
seasonally weak quarter. Satyam reported 3Q11
revenues of Rs12.7bn (+3% qoq) and EBIT margins of
3.4% (+96bps qoq). Currently, Satyam has a revenue
and net income run-rate of US$1.14bn and US$100m.
Satyam provided for impairment losses of Rs520m
related to a subsidiary that dragged reported net income.
For the first nine months 9mFY11, Satyam achieved
revenues of Rs37.7bn, EBIT margins of 3.6% (vs 4.3%
in FY10) and recurring net income of Rs1.8bn. Satyam
added 764 employees (net) in 3Q11 with closing
headcount of 28,832. Attrition rate was at 25% in 3Q11
with Utilization rates of 73.5% in 3Q11 (vs 71% in 2Q)
and Cash and cash equivalents of Rs30.5bn
(~US$670m).
Key concerns: 1) Changes in the leadership team of
TechM and MSatyam. 2) Though valuations have
moderated to 15x F11e EPS, we believe the lack of
detailed metrics around quarterly results and uncertainty
over legal cases in US will also limit any sustainable
re-rating for the stock in the near-medium term.
The road to recovery: In the last few months, TechM
has seen the exit of Mr. Kalra and MSatyam now has a
new CFO. Given the recent changes we believe an EBIT
margin turnaround for MSatyam may take longer than
expected now. This is also reflected in the cautious tone
of management commentary, in our view. Satyam
management described the coming year as “cautiously
optimistic”. Management believes that it is on track for its
3 year transformational plan and that it could take
another 18-24 months before Satyam returns to industry
level growth and profitability.
Conference Call Highlights
1) Management believes the current revenue growth
momentum is likely to sustain in order to achieve industry
level growth rates for Satyam.
2) Satyam is seeing traction in verticals like manufacturing,
BFSI, retail and service lines like enterprise solutions and
infrastructure management services. It is seeing maximum
traction for deals in the range of US$30-100m.
3) Satyam is planning to hire ~3000-3500 freshers from
campuses in FY12 and has already concluded the process
for 40-45%.
4) Manufacturing and BFSI verticals grew above company
average for Satyam in 3Q11.
5) Satyam got yield on cash of ~11% in 3Q due to gain of
Rs230m on re-jigging of investment portfolio. Management
expects yield on cash and cash equivalents to be in the
range of 8-9% going forward.
6) Management expects 4Q11 tax rate to be in line with
9mFY11 effective tax rate of 21.6%. Expects capex of
Rs2bn over next 6 months.
7) Satyam has a policy to hedge up to maximum of 24
months and has currently US$386m of hedges at
Rs46.9/US$.
Other Highlights
1) Europe revenues led revenue growth for Satyam in 3Q11
while US and Rest of the World revenues remained flat qoq.
2) Satyam has appointed a new CFO Mr Vasant Krishnan
effective 1
st
March 2011 to replace Mr Durgashankar, who will
be relocating to M&M group.
3) The extraordinary expenses relating to forensic investigation
and litigation support have come down from Rs79m and
Rs84m in 1Q and 2Q resp to Rs13m in 3Q11.
Merger with Tech Mahindra: Although management
indicated that it is the ultimate aim to merge TechM and
Satyam, the time–line continues to remain uncertain.
Management did not comment on any time-line for the
integration vs its earlier expectations of 1 year for integration.
Valuations: Based on an annualized 3Q11, Satyam is
currently trading at 17x P/E and 1.5x P/S. Merger of Satyam
and TechM remains the key overhang for TechM stock. In the
absence of clarity on the time-line for integration and swap ratio
for the merger, TechM stock could remain volatile. Maintain
UW.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tech Mahindra Limited
Satyam Dec-10 results show signs of revenue growth; Merger overhang remains
Quick Comment: Satyam’s Dec-10 results: Satyam
reported US$ revenue growth of 4.3% qoq in a
seasonally weak quarter. Satyam reported 3Q11
revenues of Rs12.7bn (+3% qoq) and EBIT margins of
3.4% (+96bps qoq). Currently, Satyam has a revenue
and net income run-rate of US$1.14bn and US$100m.
Satyam provided for impairment losses of Rs520m
related to a subsidiary that dragged reported net income.
For the first nine months 9mFY11, Satyam achieved
revenues of Rs37.7bn, EBIT margins of 3.6% (vs 4.3%
in FY10) and recurring net income of Rs1.8bn. Satyam
added 764 employees (net) in 3Q11 with closing
headcount of 28,832. Attrition rate was at 25% in 3Q11
with Utilization rates of 73.5% in 3Q11 (vs 71% in 2Q)
and Cash and cash equivalents of Rs30.5bn
(~US$670m).
Key concerns: 1) Changes in the leadership team of
TechM and MSatyam. 2) Though valuations have
moderated to 15x F11e EPS, we believe the lack of
detailed metrics around quarterly results and uncertainty
over legal cases in US will also limit any sustainable
re-rating for the stock in the near-medium term.
The road to recovery: In the last few months, TechM
has seen the exit of Mr. Kalra and MSatyam now has a
new CFO. Given the recent changes we believe an EBIT
margin turnaround for MSatyam may take longer than
expected now. This is also reflected in the cautious tone
of management commentary, in our view. Satyam
management described the coming year as “cautiously
optimistic”. Management believes that it is on track for its
3 year transformational plan and that it could take
another 18-24 months before Satyam returns to industry
level growth and profitability.
Conference Call Highlights
1) Management believes the current revenue growth
momentum is likely to sustain in order to achieve industry
level growth rates for Satyam.
2) Satyam is seeing traction in verticals like manufacturing,
BFSI, retail and service lines like enterprise solutions and
infrastructure management services. It is seeing maximum
traction for deals in the range of US$30-100m.
3) Satyam is planning to hire ~3000-3500 freshers from
campuses in FY12 and has already concluded the process
for 40-45%.
4) Manufacturing and BFSI verticals grew above company
average for Satyam in 3Q11.
5) Satyam got yield on cash of ~11% in 3Q due to gain of
Rs230m on re-jigging of investment portfolio. Management
expects yield on cash and cash equivalents to be in the
range of 8-9% going forward.
6) Management expects 4Q11 tax rate to be in line with
9mFY11 effective tax rate of 21.6%. Expects capex of
Rs2bn over next 6 months.
7) Satyam has a policy to hedge up to maximum of 24
months and has currently US$386m of hedges at
Rs46.9/US$.
Other Highlights
1) Europe revenues led revenue growth for Satyam in 3Q11
while US and Rest of the World revenues remained flat qoq.
2) Satyam has appointed a new CFO Mr Vasant Krishnan
effective 1
st
March 2011 to replace Mr Durgashankar, who will
be relocating to M&M group.
3) The extraordinary expenses relating to forensic investigation
and litigation support have come down from Rs79m and
Rs84m in 1Q and 2Q resp to Rs13m in 3Q11.
Merger with Tech Mahindra: Although management
indicated that it is the ultimate aim to merge TechM and
Satyam, the time–line continues to remain uncertain.
Management did not comment on any time-line for the
integration vs its earlier expectations of 1 year for integration.
Valuations: Based on an annualized 3Q11, Satyam is
currently trading at 17x P/E and 1.5x P/S. Merger of Satyam
and TechM remains the key overhang for TechM stock. In the
absence of clarity on the time-line for integration and swap ratio
for the merger, TechM stock could remain volatile. Maintain
UW.
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