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UBS Investment Research
Mahindra Satyam
Stable revenue, margins lacklustre
Q3FY11 revenue stable; but margins lacklustre
Mahindra Satyam reported revenues of Rs12.8bn, up 3.0% QoQ. Consolidated
operating margins were low at 3.4% due to higher S,G&A. Net profit was Rs589m,
compared with Rs233m in 2QFY11. The increase in net profit was led by a lower
tax rate of 21% (of PBT), which we believe is normalised level versus the last
quarter high of 52.9%.
Operating margins to be reset to levels lower than FY10
Operating margins in IT services were 4.0%, lower than the FY10 consolidated
level of 4.4%. We have factored in operating margin for FY11 at 4.2%, primarily
due to lower employee costs. We are also disappointed by the lack of improvement
in SG&A at 22.6% of revenues, compared with 20.5% in Q1 and Q2.
Merger terms with Tech Mahindra still remains an overhang
The merger with Tech Mahindra has been put on hold at present. We believe the
terms of merger with Tech Mahindra could be a downside risk if the merger ratio is
unfavourable. We continue to prefer Tech Mahindra to Satyam as we expect the
merger ratio to favour Tech Mahindra.
Valuation: maintain Sell with a price target of Rs65
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. Satyam is hosting a
conference call today at 6.00pm India time (dial-in: 22-3065-0339 /1-866-746-
2133).
Mahindra Satyam
Mahindra Satyam (Satyam) was founded in 1987. After being acquired by Tech
Mahindra, Satyam is now a part of the Mahindra Group. Satyam offers
consulting, application development and maintenance, enterprise solutions,
infrastructure services and business process outsourcing (BPO) services across
various verticals. The company has presence in 34 countries.
Statement of Risk
A sharp decline in IT spending could result in downward revision of our
earnings estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Mahindra Satyam
Stable revenue, margins lacklustre
Q3FY11 revenue stable; but margins lacklustre
Mahindra Satyam reported revenues of Rs12.8bn, up 3.0% QoQ. Consolidated
operating margins were low at 3.4% due to higher S,G&A. Net profit was Rs589m,
compared with Rs233m in 2QFY11. The increase in net profit was led by a lower
tax rate of 21% (of PBT), which we believe is normalised level versus the last
quarter high of 52.9%.
Operating margins to be reset to levels lower than FY10
Operating margins in IT services were 4.0%, lower than the FY10 consolidated
level of 4.4%. We have factored in operating margin for FY11 at 4.2%, primarily
due to lower employee costs. We are also disappointed by the lack of improvement
in SG&A at 22.6% of revenues, compared with 20.5% in Q1 and Q2.
Merger terms with Tech Mahindra still remains an overhang
The merger with Tech Mahindra has been put on hold at present. We believe the
terms of merger with Tech Mahindra could be a downside risk if the merger ratio is
unfavourable. We continue to prefer Tech Mahindra to Satyam as we expect the
merger ratio to favour Tech Mahindra.
Valuation: maintain Sell with a price target of Rs65
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. Satyam is hosting a
conference call today at 6.00pm India time (dial-in: 22-3065-0339 /1-866-746-
2133).
Mahindra Satyam
Mahindra Satyam (Satyam) was founded in 1987. After being acquired by Tech
Mahindra, Satyam is now a part of the Mahindra Group. Satyam offers
consulting, application development and maintenance, enterprise solutions,
infrastructure services and business process outsourcing (BPO) services across
various verticals. The company has presence in 34 countries.
Statement of Risk
A sharp decline in IT spending could result in downward revision of our
earnings estimates.
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