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Satyam Computer Services
Time to put back on the radar; Volume growth can catch up with industry by 2H
Satyam’s deal participation has been improving and
should reflect in financials by 2H FY12, in our view. We
raise FY12 EPS by 15%
Most of the legal liabilities are settled; we expect the
merger process with TECHM IN to speed up
Our analysis indicates ADR delisting may be unfeasible
– SEC holds key to merger timelines and structure
Contrarian view: we believe Satyam’s US$1bn free-float
and US listing should ensure ~market weight swap ratio
Given increasingly limited scale investment plays in the
sector, sustained EBITDA growth could drive re-rating
Upgrade to OP; PT raised to Rs95 (Rs68 earlier)
Volume growth can catch up with industry by 2H FY12.
With the constraint of absent published financials now over,
our channel checks suggest a pick-up in deal participation.
Building a typical sales cycle, we expect it to reflect in deal
wins in 1-2 quarters. Potential ramp up in the 70+ new logo
wins in 9M FY11 could also help. The 5,000+ campus offers
for FY12 joining suggest volume recovery is on track.
Utilization expansion + fresher hiring = margin growth.
We believe project staffing remains loose – current
utilization could be <70%, below reported levels, given weak
internal tracking systems – thus affecting manpower costs
(at 75% of revenues versus 56% for Infosys). Thus, a high
attrition (25% in 3Q11) could, in fact, help near-term when
coupled with lower unit-cost replacement (FY12 fresher
intake to be 25% higher versus FY11) in an up-trending
volume growth scenario.
Merger with TECHM: SEC holds the key. Post settlement
of most legal liabilities, we expect the merger with TECHM
could get initiated over the next 6 months. Our analysis
rules out possible delisting/deregistration of Satyam ADR.
Thus a direct merger is most likely; however it will involve
active negotiations with the SEC, especially on updation of
US GAAP financials for SCS and listing waivers for TECHM.
Satyam could still be an organic turnaround play. Its
US$1bn+ free-float, US listing and government/media focus
should ensure a balanced swap ratio, in our view. We raise
our FY12/13 EPS by 15%/34% and upgrade the stock to OP
to play the potential volume/margin uptrend. Our FY13 P/E
based price target of Rs95 (15x) implies 10%/27% discount
to HCLT/TCS. Sustained yoy EBITDA growth will be the key
re-rating driver over the next 6/9 months, in our view
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Satyam Computer Services
Time to put back on the radar; Volume growth can catch up with industry by 2H
Satyam’s deal participation has been improving and
should reflect in financials by 2H FY12, in our view. We
raise FY12 EPS by 15%
Most of the legal liabilities are settled; we expect the
merger process with TECHM IN to speed up
Our analysis indicates ADR delisting may be unfeasible
– SEC holds key to merger timelines and structure
Contrarian view: we believe Satyam’s US$1bn free-float
and US listing should ensure ~market weight swap ratio
Given increasingly limited scale investment plays in the
sector, sustained EBITDA growth could drive re-rating
Upgrade to OP; PT raised to Rs95 (Rs68 earlier)
Volume growth can catch up with industry by 2H FY12.
With the constraint of absent published financials now over,
our channel checks suggest a pick-up in deal participation.
Building a typical sales cycle, we expect it to reflect in deal
wins in 1-2 quarters. Potential ramp up in the 70+ new logo
wins in 9M FY11 could also help. The 5,000+ campus offers
for FY12 joining suggest volume recovery is on track.
Utilization expansion + fresher hiring = margin growth.
We believe project staffing remains loose – current
utilization could be <70%, below reported levels, given weak
internal tracking systems – thus affecting manpower costs
(at 75% of revenues versus 56% for Infosys). Thus, a high
attrition (25% in 3Q11) could, in fact, help near-term when
coupled with lower unit-cost replacement (FY12 fresher
intake to be 25% higher versus FY11) in an up-trending
volume growth scenario.
Merger with TECHM: SEC holds the key. Post settlement
of most legal liabilities, we expect the merger with TECHM
could get initiated over the next 6 months. Our analysis
rules out possible delisting/deregistration of Satyam ADR.
Thus a direct merger is most likely; however it will involve
active negotiations with the SEC, especially on updation of
US GAAP financials for SCS and listing waivers for TECHM.
Satyam could still be an organic turnaround play. Its
US$1bn+ free-float, US listing and government/media focus
should ensure a balanced swap ratio, in our view. We raise
our FY12/13 EPS by 15%/34% and upgrade the stock to OP
to play the potential volume/margin uptrend. Our FY13 P/E
based price target of Rs95 (15x) implies 10%/27% discount
to HCLT/TCS. Sustained yoy EBITDA growth will be the key
re-rating driver over the next 6/9 months, in our view
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