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Mahindra Satyam Ltd. — Re-rating overdone:
Downside to consensus; Underperform
Reinstatement of Coverage
Rich valuations; downside risk to consensus
We are reinitiating coverage on Mahindra Satyam (Satyam) with an Underperform
rating and PO of Rs78, implying 8% downside, based on 14x FY13E earnings.
We believe the stock has already discounted the strong margin expansion in
4QFY11 and remain cautious on further margin expansion given our view that its
revenue growth is likely to lag peers. Our FY12E/13E EPS is 10/15% below
consensus. Further, we believe the stock is rich at 15x FY13E and trades at a
premium to peers such as HCL Technologies given half their earnings growth and
lower margin profile and return ratios. Our PO is at a 10% discount to target
multiples for HCLT.
See challenges in revenue growth
We expect revenue growth to lag peers given that it derives over 40% of revenue
from manufacturing and telecom verticals which are relatively slower growing
verticals today post the events in Japan which impact industries like autos and
the ongoing consolidation and regulation challenges in the telecom segment.
Second, in our view investment in sales is still in process. The existing sales force
in the US has also been on board only for the last six months or less and will take
a couple of quarters at least to start delivering.
Weak employee pyramid to weigh on margins
We forecast margins to expand by 70bp from 4Q levels – vs. 170bp assumed by
the Street – given our view that benefits from the employee pyramid are likely to
be slower than assumed by the Street, due to likely slower revenue growth.
Besides, with offshore salary cost estimated to be at 50% of salaries vs. 40% for
peers, impact of the wage hike is likely to be higher than for peers. Key upside
risks lie in large deal closures and higher-than-anticipated benefits from SG&A
optimization.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra Satyam Ltd. — Re-rating overdone:
Downside to consensus; Underperform
Reinstatement of Coverage
Rich valuations; downside risk to consensus
We are reinitiating coverage on Mahindra Satyam (Satyam) with an Underperform
rating and PO of Rs78, implying 8% downside, based on 14x FY13E earnings.
We believe the stock has already discounted the strong margin expansion in
4QFY11 and remain cautious on further margin expansion given our view that its
revenue growth is likely to lag peers. Our FY12E/13E EPS is 10/15% below
consensus. Further, we believe the stock is rich at 15x FY13E and trades at a
premium to peers such as HCL Technologies given half their earnings growth and
lower margin profile and return ratios. Our PO is at a 10% discount to target
multiples for HCLT.
See challenges in revenue growth
We expect revenue growth to lag peers given that it derives over 40% of revenue
from manufacturing and telecom verticals which are relatively slower growing
verticals today post the events in Japan which impact industries like autos and
the ongoing consolidation and regulation challenges in the telecom segment.
Second, in our view investment in sales is still in process. The existing sales force
in the US has also been on board only for the last six months or less and will take
a couple of quarters at least to start delivering.
Weak employee pyramid to weigh on margins
We forecast margins to expand by 70bp from 4Q levels – vs. 170bp assumed by
the Street – given our view that benefits from the employee pyramid are likely to
be slower than assumed by the Street, due to likely slower revenue growth.
Besides, with offshore salary cost estimated to be at 50% of salaries vs. 40% for
peers, impact of the wage hike is likely to be higher than for peers. Key upside
risks lie in large deal closures and higher-than-anticipated benefits from SG&A
optimization.
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