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Mahindra Satyam (SCS)
Technology
Aggressive cost control drives another quarter of estimate beat. Satyam reported
another quarter of solid beat on EBITDA estimate, even as revenue growth was broadly
in line. Higher-than-expected other income (led by forex gains and one-off divestment
proceeds) and lower-than-expected ETR drove sharp net income beat as well. Satyam’s
strong performance drives meaningful EPS estimate revision for FY2012/13E. Skepticism
on sustenance of margins and quality of growth makes us lower our target multiple.
Retain REDUCE rating and TP of Rs80/share.
1QFY12 – in-line revenues, better-than-expected EBITDA and PAT
Satyam’s reported revenues of US$320 mn (+5.3% qoq, +19.3% yoy) for the June 2011 quarter
were broadly in line with our estimates. However, better-than-expected EBITDA margin (14.6%,
+160 bps qoq versus our estimate of flat qoq margins) drove 12.3% beat at the EBITDA level –
reported EBITDA was Rs2.1 bn (+18% qoq) versus our estimate of Rs1.87 bn. Forex gains of Rs250
mn and Rs190 mn income from divestment of a subsidiary, both not factored into our estimates,
added to the beat at the net income level. Satyam reported net income of Rs2.25 bn versus our
estimated Rs1.4 bn.
Business turnaround has exceeded expectations
Satyam’s new management team has done a brilliant job, not only in protecting a reasonable
revenue base of the erstwhile company, but also in stabilizing operations, delivering consistent
growth over the past quarters, and cost rationalization. Nonetheless, there are two areas that keep
us skeptics – (1) quality of growth – a bulk of growth in recent quarters has come from emerging
markets; growth in the key client geographies of North America and Europe has been tepid,
indicating that more work needs to be done to gain the pre-fraud acceptance in mature markets,
and (2) further margin upside – we believe cost rationalization driven margin improvement
potential is limited hereon and further margin upside hinges on revenue productivity
improvements (read pricing) – something that could be difficult in the current macro environment.
We take a closer look at the margin challenge below.
Margin upside from 1QFY12 levels hinges on revenue productivity improvement
Exhibit 1 compares Satyam’s per employee revenue and cost metrics with that of Infosys and TCS.
Satyam’s revenue per employee, 16% lower than Infosys and 12% lower than TCS, despite higher
onsite revenues depicts the inferior business and pricing mix of Satyam. Per employee personnel
expenses, despite higher onsite proportion is at par with an Infosys, suggesting little further
leverage on this front. Non-employee expenses as % of revenues at 14.7% is lower than TCS
(16.4%) and Satyam may not have much leverage left on this front, either.
Revising EPS estimates upwards; retain REDUCE rating
Exhibit 2 depicts the key changes to our estimates for Satyam. We broadly maintain our
revenue estimates for FY2012E while reducing our FY2013E revenue estimates by 3% to
factor in increased macro uncertainty. Increased margin estimates and reduced ETR
assumptions drive an upward revision in FY2012/13E EPS to Rs6.7/7.3 from Rs4.9/6.1 earlier.
We, however, reduce our target multiple to 11X FY2013E to factor in higher risks to revised
margin assumptions and higher cost of capital assumption. Maintain our TP on the stock at
Rs80/share and reiterate REDUCE.
Other results highlights
Effective tax rate for the quarter was a low 15.9%. The company attributed the same to
tax credit on unabsorbed past losses. We note that Satyam had reported a net loss of
Rs82 bn, Rs1.2 bn, and Rs1.5 bn for FY2009, FY2010, and FY2011, respectively. 1QFY12
ETR and management’s guidance of a 15-18% ETR for the remainder of FY2012E
suggests that the company is possibly taking tax credits for FY2009 losses as well.
Satyam added a net 2,172 employees in 1QFY12 taking the end-June 2011 headcount to
31,438. This includes induction of approximately 1,300 freshers.
Attrition for the quarter was 17%, down from 22% in 4QFY11.
Technical headcount utilization for the quarter was 74%, including trainees. Satyam’s
utilization is now in line with other industry players.
Volume growth for the quarter was 3.9%.
Satyam has pushed back its wage hike cycle to October 1, 2011 and has indicated a 12%
offshore and 2.5% onsite wage revision.
Cash and equivalents at end-June 2011 (excluding the Upaid settlement amount
deposited in an escrow account) stood at Rs21.5 bn.
DSO for the quarter was 101 days. Company did not generate meaningful free cash
during the quarter.
Satyam has announced that it would initiate a wind-down program for its ADS in the US.
The company has indicated a 7-month window for total wind-down. We note that
roughly 9.4% of the company’s equity base (~110 mn local shares) is held in the form of
ADS. Satyam would not buy back any of the ADS, but at the termination of the Deposit
Agreement the ADS that haven’t been surrendered will be compulsorily redeemed into
local shares and held in an account in India. Citibank will sell those shares and remit the
proceeds, net of any fees, taxes and expenses, pro rata to the holders.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra Satyam (SCS)
Technology
Aggressive cost control drives another quarter of estimate beat. Satyam reported
another quarter of solid beat on EBITDA estimate, even as revenue growth was broadly
in line. Higher-than-expected other income (led by forex gains and one-off divestment
proceeds) and lower-than-expected ETR drove sharp net income beat as well. Satyam’s
strong performance drives meaningful EPS estimate revision for FY2012/13E. Skepticism
on sustenance of margins and quality of growth makes us lower our target multiple.
Retain REDUCE rating and TP of Rs80/share.
1QFY12 – in-line revenues, better-than-expected EBITDA and PAT
Satyam’s reported revenues of US$320 mn (+5.3% qoq, +19.3% yoy) for the June 2011 quarter
were broadly in line with our estimates. However, better-than-expected EBITDA margin (14.6%,
+160 bps qoq versus our estimate of flat qoq margins) drove 12.3% beat at the EBITDA level –
reported EBITDA was Rs2.1 bn (+18% qoq) versus our estimate of Rs1.87 bn. Forex gains of Rs250
mn and Rs190 mn income from divestment of a subsidiary, both not factored into our estimates,
added to the beat at the net income level. Satyam reported net income of Rs2.25 bn versus our
estimated Rs1.4 bn.
Business turnaround has exceeded expectations
Satyam’s new management team has done a brilliant job, not only in protecting a reasonable
revenue base of the erstwhile company, but also in stabilizing operations, delivering consistent
growth over the past quarters, and cost rationalization. Nonetheless, there are two areas that keep
us skeptics – (1) quality of growth – a bulk of growth in recent quarters has come from emerging
markets; growth in the key client geographies of North America and Europe has been tepid,
indicating that more work needs to be done to gain the pre-fraud acceptance in mature markets,
and (2) further margin upside – we believe cost rationalization driven margin improvement
potential is limited hereon and further margin upside hinges on revenue productivity
improvements (read pricing) – something that could be difficult in the current macro environment.
We take a closer look at the margin challenge below.
Margin upside from 1QFY12 levels hinges on revenue productivity improvement
Exhibit 1 compares Satyam’s per employee revenue and cost metrics with that of Infosys and TCS.
Satyam’s revenue per employee, 16% lower than Infosys and 12% lower than TCS, despite higher
onsite revenues depicts the inferior business and pricing mix of Satyam. Per employee personnel
expenses, despite higher onsite proportion is at par with an Infosys, suggesting little further
leverage on this front. Non-employee expenses as % of revenues at 14.7% is lower than TCS
(16.4%) and Satyam may not have much leverage left on this front, either.
Revising EPS estimates upwards; retain REDUCE rating
Exhibit 2 depicts the key changes to our estimates for Satyam. We broadly maintain our
revenue estimates for FY2012E while reducing our FY2013E revenue estimates by 3% to
factor in increased macro uncertainty. Increased margin estimates and reduced ETR
assumptions drive an upward revision in FY2012/13E EPS to Rs6.7/7.3 from Rs4.9/6.1 earlier.
We, however, reduce our target multiple to 11X FY2013E to factor in higher risks to revised
margin assumptions and higher cost of capital assumption. Maintain our TP on the stock at
Rs80/share and reiterate REDUCE.
Other results highlights
Effective tax rate for the quarter was a low 15.9%. The company attributed the same to
tax credit on unabsorbed past losses. We note that Satyam had reported a net loss of
Rs82 bn, Rs1.2 bn, and Rs1.5 bn for FY2009, FY2010, and FY2011, respectively. 1QFY12
ETR and management’s guidance of a 15-18% ETR for the remainder of FY2012E
suggests that the company is possibly taking tax credits for FY2009 losses as well.
Satyam added a net 2,172 employees in 1QFY12 taking the end-June 2011 headcount to
31,438. This includes induction of approximately 1,300 freshers.
Attrition for the quarter was 17%, down from 22% in 4QFY11.
Technical headcount utilization for the quarter was 74%, including trainees. Satyam’s
utilization is now in line with other industry players.
Volume growth for the quarter was 3.9%.
Satyam has pushed back its wage hike cycle to October 1, 2011 and has indicated a 12%
offshore and 2.5% onsite wage revision.
Cash and equivalents at end-June 2011 (excluding the Upaid settlement amount
deposited in an escrow account) stood at Rs21.5 bn.
DSO for the quarter was 101 days. Company did not generate meaningful free cash
during the quarter.
Satyam has announced that it would initiate a wind-down program for its ADS in the US.
The company has indicated a 7-month window for total wind-down. We note that
roughly 9.4% of the company’s equity base (~110 mn local shares) is held in the form of
ADS. Satyam would not buy back any of the ADS, but at the termination of the Deposit
Agreement the ADS that haven’t been surrendered will be compulsorily redeemed into
local shares and held in an account in India. Citibank will sell those shares and remit the
proceeds, net of any fees, taxes and expenses, pro rata to the holders.
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