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Resurrection strategy payoff likely …
Revenues and EBIT margins stabilise
• Subsequent to its takeover of Mahindra Satyam and having faced
several headwinds during the initial 12-18 months, the new
management has laid the foundation for rebuilding the company
• Two of the three year transformation strategy has elapsed
wherein the management arrested revenue decline and employee
attrition. Further, it increased its efforts to improve customer
confidence
• In Q4FY11, the company reported a sequential revenue growth of
7.5%, one of the highest in the industry and EBIT margins of 9.7%
vs. 2.5% in Q2FY11
• The company has settled most of the legal issues
• Merger with Tech Mahindra could be a positive trigger
• The company plans to add ~17,000 employees in the next three
years. This suggests demand traction
Going ahead
• Expect revenues to grow in-line with industry average (~18%
YoY) helped in part by volume growth
• Business mix improvement and cost rationalisation led by
flattening of the employee pyramid could aid EBIT margin
improvement, going forward
• The company is likely to file US GAAP numbers by October-
November 2011. This could be a positive development
• Indian GAAP financials have been reinstated. Revenue and net
profit have stabilised
• Improvement in revenue and operating performance would be a
key trigger for valuation re-rating
Valuation
The demand environment continues to be robust led by discretionary
spending across verticals and service lines. Mahindra Satyam continues
to add new clients. We believe the restructuring exercise is on track and
could yield meaningful results from here. From a valuation perspective,
the company is available at 1.9x sales vs. ~6x for Tier I IT companies.
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