28 June 2011

Satyam Computer – Satyam-Tech Mahindra Analyst Meet::RBS

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Key takeaways from Satyam-TechM joint analyst meet are i) Satyam remains confident on growth
outlook and synergy with TechM; ii) TechM expects muted growth from BT, however expects
telecom demand recovery by 2HCY11; iii) merger of Satyam-TechM to take at least 9-12 months.
Satyam Computer remains confident on growth outlook
Satyam highlighted that credibility of clients being rebuilt with 12 lost clients coming back in
past two quarters and embargoes on bids are being lifted.
Despite increasing participation of Satyam in large deals, benefits of the same would be seen
more in FY13 rather than FY12. Despite this, management remains confident of achieving
industry average growth in revenues during FY12 considering growth from existing clients
through deeper mining as well as growth from higher number of new clients added in FY11 (in
4QFY11 alone it added 30 new logos with reported addition being lower at 12 considering the
minimum billing threshold for counting a new client addition).
One of the notable points was +95% renewal rate with existing clients, which clearly indicates
that Satyam has regained client confidence. This will give Satyam an opportunity to mine
clients better with cross selling of different services.
Despite having high concentration to Enterprise Solutions (+40% of revenues) and
Manufacturing vertical (32% of revenues), it is worthwhile to note that Satyam is well
diversified within each of these. Enterprise solutions employees (~10800) are well distributed
with SAP and Oracle practice each having 25% of the strength while BI/Analytics and
Extended Enterprise Solution each having +20% strength. Even vertically it is well spread
beyond manufacturing. Within the Manufacturing vertical, Satyam has well spread revenues
from Discrete Manufacturing, Auto, Process Manufacturing and Aero/Defense. Therefore we
believe that this diversification will help Satyam to reduce the growth volatility as well as to
serve as strong entry drivers within new clients going forward.
Satyam continues to expect margin leverage from i) improving volume growth; ii) employee
pyramid (just 20% of the employees with less than 3 years of experience) ii) SG&A leverage;
iii) productivity gains within fixed price projects; iv) offshoring (currently 43% of revenues); iv)
pricing improvements (likely to be gradual)
Business synergy with TechM
The combined entity (TechM+Satyam) is looking to tap each others' strength within respective
domains. Satyam specialises within Enterprise solutions while TechM has forte within security
services, managed services/system integration. The combined entity will have client base of
around +350 with Satyam having 230 active clients. Each entity has forte within ADM, IMS
and BPO for their respective verticals.
Within enterprise solutions, Satyam already bagged +10 new clients who are existing clients
of TechM. Another large deal won by TechM from Vodafone Australia includes material
portion of enterprise solution work.
Besides synergy with TechM, Satyam and TechM are also likely to gain from M&M's
(Mahindra & Mahindra) forte within manufacturing while tapping opportunities from suppliers
as well as partners of M&M. M&M's tie up with CISCO for co-innovation in the areas including
i) Data Centres/Cloud offerings ii) Sports and Entertainment; iii) Virtual Dealership; iv) Smart
Cities will lead to incremental services business for TechM-Satyam.
Even operationally we believe that combined entity will have more cost synergy with reduced
SG&A as well as facility consolidation.
TechM: Growth from BT remains challenging
TechM continues to expect muted growth from its top client BT (41% of revenues) going
forward. However it expects higher growth to continue within emerging markets through
greenfield expansion as well as managed services operations.


Within developed markets, with signs of revival within capex cycle of operators, TechM is
hoping for the revival in the opex cycle over medium term. With TechM's increasing traction
within managed services and system integration, it believes that large deal renewals will drive
incremental growth from clients within developed countries.
TechM-Satyam merger to take at least 9-12 months
With most of the major legal disputes of Satyam behind (including US class suit, taxation,
SEC and Upaid), the management is looking to fast track the merger process hereon.
However considering Satyam's Nasdaq listing, the merger will require up-to-date US GAAP
accounts of Satyam. The management of Satyam is in continuous touch with SEC to comply
this as per the required directives.
Satyam continues to re-iterate that pending Raju family claim is untenable and the same is
unlikely to delay the merger process. Considering pending litigation with Aberdeen class of
investors (with their claim of US$68mn), the settlement with them would be an ideal situation
for TechM-Satyam to start the merger process in our view.
Currently the management estimates the merger process to take at least 9-12 months hereon
to get over.
Valuation and view:
Post our upgrade to buy, Satyam has rallied significantly. However we continue to remain
positive considering benefits of turn around likely to continue over medium to long term. Key
risks to our recommendation being i) higher than expected litigation cost/liabilities; ii) slower
than expected operational turn around; iii) terms of planned merger of Tech Mahindra and
Satyam being in favour of TechM shareholders.
We continue believe that business risk within TechM remains higher and recommend to play
the telecom recovery cycle for TechM, if any, through Satyam considering planned merger as
well as lower business risk.

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