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Satyam Computer Services : Not out of the woods, yet
Satyam reported 4.3% qoq US$ revenue growth above
our estimate, helped by better volume (+2.5% qoq) and
a positive cross currency/higher onsite share
Cost management surprised positively; EBITDA margin
expanded 49bp qoq due to improved utilization (+250bp)
We believe near-term financial metrics may remain
volatile qoq; we are cautious on projecting the 3Q
results long-range, as deal traction/margin management
remain a challenge.
Maintain IN-LINE; PT revised to Rs68 (from Rs64)
3Q11 results: recovery is on track. Cons. revenue grew
4.3% qoq to US$284m, driven by volumes (+2.5%) and
positive cross-currency/higher onsite (+1.8% est.) even as
absolute pricing was reported flat. Blended realisation was
flat (+10bp qoq). EBITDA margin expanded 49bp (we
expected 117bp drop) mainly due to improved utilization
(+250bp qoq). Manpower costs (including subcontractor
costs) were flat (+0.6%qoq) due to lower gratuity costs.
Reported PAT, at Rs589m, including Rs520m one-time
write-down, was up 153% qoq, above our estimate, helped
by Rs134m FX gains and better yields.
Volume momentum picks up, though at modest pace.
Volume growth has come back after 2Q decline. While it
trails larger peers (3.1-6.7% in 3Q), we expect it to improve
given robust hiring (+2.5% to 2Q base) and utilization
headroom. However, client addition remains low (+3 in 3Q)
and while RFP participation is reported to have picked up,
we believe deal wins, especially of large deals, may remain
a challenge given the uncertainties on financial liabilities
and business structure evolution.
We remain cautious on the margin outlook. Interplay of
utilization, onsite:offshore and fresher:lateral mix could give
margin support but may be of limited help on supply-side
pressures if volume trajectory remains low. Pricing power
will likely remain weak in the medium term, in our view. We
maintain our FY13 EBITDA margin estimates at c11%.
Maintain IN-LINE. We adjust our estimates for 3Q actuals.
The sharp 39% jump in FY11F EPS is mainly due to 3Q’s
high other income; FY12/13 changes are more a flow from
better-than-expected operating metrics. However, with
stock at 16x FY12 EPS and our cautious margin outlook,
we maintain IN-LINE. Our EV/EBITDA to EBITDA growth
multiple based target price is revised to Rs68, building a
higher FY10-13 EBITDA growth (12% versus 11% earlier).
Continued sale by L&T of its residual 1.96% (2.16% in 2Q)
stake remains a risk.
IN-LINE maintained
We retain our cautious outlook on Satyam as deal traction/margin management remain a
challenge. The increase in our EPS estimates is essentially a flow through from the 3Q
FY11 performance. We reiterate our IN-LINE recommendation with a price target of Rs68.
We broadly retain our operational outlook on Satyam with changes to our forecasts flowing
mainly the 3Q FY11 revenue and margin out performance. We believe that financial metrics may
remain volatile in the near term and do not project the 3Q performance long-range. Our FY11-13
US$ revenue CAGR is 15.3% with EBITDA margin increasing 357bp over the same period to
11.0% by FY13. While there is a 39% jump in our FY11 EPS estimate (primarily on account of
increase in other income), the increase in FY12 and FY13 EPS is comparatively muted and flows
through primarily from incorporation of 3Q FY11 actuals
Reiterate IN-LINE rating at a price target of Rs68
Given the uncertain outlook on Satyam’s effective tax rate, we continue to value the stock on
EV/EBITDA to EBITDA growth multiple, which also captures the potential margin expansion play.
Our Rs68 price target values the stock at 7.1x FY13 EV/EBITDA, a 0.6x EV/EBITDA to EBITDA
growth ratio that is inline with HCL Tech, the closest peer. The implied 16.5x on FY12E EPS
implies a 21% discount to Infosys, versus 0-150% premium band over the past two years. Our
valuation is inclusive of US$100m of potential litigation costs. Note that the company has pending
class-action suits as well as alleged claims of Rs12,304m by erstwhile Satyam creditors.
Risks to our estimates and price target
Key downside risks to our price target are: 1) rupee appreciation beyond the levels we assume
and/or adverse cross-currency movements; 2) any renegotiations/loss of contracts with major
clients; 3) negative developments on outstanding litigation; and 4) strong regulatory action
against outsourcing in Mahindra Satyam’s key geographic markets.
Upside could come from: 1) rupee appreciation slower than the level we assume; 2) faster than
anticipated recovery in project awards/ramp-ups; large-deal wins ahead of numbers or contract
value factored into our estimates; and 3) positive developments on outstanding litigation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Satyam Computer Services : Not out of the woods, yet
Satyam reported 4.3% qoq US$ revenue growth above
our estimate, helped by better volume (+2.5% qoq) and
a positive cross currency/higher onsite share
Cost management surprised positively; EBITDA margin
expanded 49bp qoq due to improved utilization (+250bp)
We believe near-term financial metrics may remain
volatile qoq; we are cautious on projecting the 3Q
results long-range, as deal traction/margin management
remain a challenge.
Maintain IN-LINE; PT revised to Rs68 (from Rs64)
3Q11 results: recovery is on track. Cons. revenue grew
4.3% qoq to US$284m, driven by volumes (+2.5%) and
positive cross-currency/higher onsite (+1.8% est.) even as
absolute pricing was reported flat. Blended realisation was
flat (+10bp qoq). EBITDA margin expanded 49bp (we
expected 117bp drop) mainly due to improved utilization
(+250bp qoq). Manpower costs (including subcontractor
costs) were flat (+0.6%qoq) due to lower gratuity costs.
Reported PAT, at Rs589m, including Rs520m one-time
write-down, was up 153% qoq, above our estimate, helped
by Rs134m FX gains and better yields.
Volume momentum picks up, though at modest pace.
Volume growth has come back after 2Q decline. While it
trails larger peers (3.1-6.7% in 3Q), we expect it to improve
given robust hiring (+2.5% to 2Q base) and utilization
headroom. However, client addition remains low (+3 in 3Q)
and while RFP participation is reported to have picked up,
we believe deal wins, especially of large deals, may remain
a challenge given the uncertainties on financial liabilities
and business structure evolution.
We remain cautious on the margin outlook. Interplay of
utilization, onsite:offshore and fresher:lateral mix could give
margin support but may be of limited help on supply-side
pressures if volume trajectory remains low. Pricing power
will likely remain weak in the medium term, in our view. We
maintain our FY13 EBITDA margin estimates at c11%.
Maintain IN-LINE. We adjust our estimates for 3Q actuals.
The sharp 39% jump in FY11F EPS is mainly due to 3Q’s
high other income; FY12/13 changes are more a flow from
better-than-expected operating metrics. However, with
stock at 16x FY12 EPS and our cautious margin outlook,
we maintain IN-LINE. Our EV/EBITDA to EBITDA growth
multiple based target price is revised to Rs68, building a
higher FY10-13 EBITDA growth (12% versus 11% earlier).
Continued sale by L&T of its residual 1.96% (2.16% in 2Q)
stake remains a risk.
IN-LINE maintained
We retain our cautious outlook on Satyam as deal traction/margin management remain a
challenge. The increase in our EPS estimates is essentially a flow through from the 3Q
FY11 performance. We reiterate our IN-LINE recommendation with a price target of Rs68.
We broadly retain our operational outlook on Satyam with changes to our forecasts flowing
mainly the 3Q FY11 revenue and margin out performance. We believe that financial metrics may
remain volatile in the near term and do not project the 3Q performance long-range. Our FY11-13
US$ revenue CAGR is 15.3% with EBITDA margin increasing 357bp over the same period to
11.0% by FY13. While there is a 39% jump in our FY11 EPS estimate (primarily on account of
increase in other income), the increase in FY12 and FY13 EPS is comparatively muted and flows
through primarily from incorporation of 3Q FY11 actuals
Reiterate IN-LINE rating at a price target of Rs68
Given the uncertain outlook on Satyam’s effective tax rate, we continue to value the stock on
EV/EBITDA to EBITDA growth multiple, which also captures the potential margin expansion play.
Our Rs68 price target values the stock at 7.1x FY13 EV/EBITDA, a 0.6x EV/EBITDA to EBITDA
growth ratio that is inline with HCL Tech, the closest peer. The implied 16.5x on FY12E EPS
implies a 21% discount to Infosys, versus 0-150% premium band over the past two years. Our
valuation is inclusive of US$100m of potential litigation costs. Note that the company has pending
class-action suits as well as alleged claims of Rs12,304m by erstwhile Satyam creditors.
Risks to our estimates and price target
Key downside risks to our price target are: 1) rupee appreciation beyond the levels we assume
and/or adverse cross-currency movements; 2) any renegotiations/loss of contracts with major
clients; 3) negative developments on outstanding litigation; and 4) strong regulatory action
against outsourcing in Mahindra Satyam’s key geographic markets.
Upside could come from: 1) rupee appreciation slower than the level we assume; 2) faster than
anticipated recovery in project awards/ramp-ups; large-deal wins ahead of numbers or contract
value factored into our estimates; and 3) positive developments on outstanding litigation.
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