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We believe Satyam's improved operational execution in past few quarters and
continuing high operating leverage going forward should help it withstand the
recently increased macro headwinds. Despite our FY13/14F EPS cuts of 4%, we
believe EV/EBITDA-based valuations are reasonable. Reiterate Buy
Better poised to withstand macro headwinds
With challenges of client attrition, financial restatements, and the right-sizing of an excess
employee base behind the company, and current contract renewal rates with existing clients
above 95%, we believe that Satyam is now better poised to withstand the increased macro
headwinds. Satyam is now participating in large deals above TCV of US$25m-50m with
accelerated large deal activity in last couple of quarters. Despite the high revenue
contribution from discretionary services (where growth challenges are high in times of macro
turmoil), Satyam’s diversified revenue base across verticals and geographies should limit the
revenue growth challenges going forward, in our opinion.
High operating leverage to continue
Despite the increased macro headwinds, we believe Satyam’s operating leverage should
mitigate any margin pressure, given its headroom in various margin levers continues to
remain high including: 1) one of the lowest compositions of employees with less than three
years’ experience and an increasing pool of fresh college hires, 2) offshoring and 3) SG&A
leverage. Despite Satyam’s low revenue base versus large-cap peers, we do not anticipate
any material billing rate pressure given Satyam’s much lower rates. On the contrary, we
expect relatively higher improvement post macro stabilisation.
Reiterate Buy
Given the current elevated macro headwinds, we cut our USD revenue estimates by 5% and
INR EPS by 4% for FY13/FY14. We continue to value Satyam on EV/EBITDA basis given
the high volatility below the EBITDA line from other income, forex gain/loss and tax. We cut
our target price to Rs86 (from Rs94) which implies an FY13F EV/EBITDA of 7.6x, down from
the earlier 8.2x, to maintain the discount of around 35-40% to our industry benchmark
Infosys and around 20% to HCL Tech (to factor in lower revenue and EBITDA margins than
Infosys and HCL).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We believe Satyam's improved operational execution in past few quarters and
continuing high operating leverage going forward should help it withstand the
recently increased macro headwinds. Despite our FY13/14F EPS cuts of 4%, we
believe EV/EBITDA-based valuations are reasonable. Reiterate Buy
Better poised to withstand macro headwinds
With challenges of client attrition, financial restatements, and the right-sizing of an excess
employee base behind the company, and current contract renewal rates with existing clients
above 95%, we believe that Satyam is now better poised to withstand the increased macro
headwinds. Satyam is now participating in large deals above TCV of US$25m-50m with
accelerated large deal activity in last couple of quarters. Despite the high revenue
contribution from discretionary services (where growth challenges are high in times of macro
turmoil), Satyam’s diversified revenue base across verticals and geographies should limit the
revenue growth challenges going forward, in our opinion.
High operating leverage to continue
Despite the increased macro headwinds, we believe Satyam’s operating leverage should
mitigate any margin pressure, given its headroom in various margin levers continues to
remain high including: 1) one of the lowest compositions of employees with less than three
years’ experience and an increasing pool of fresh college hires, 2) offshoring and 3) SG&A
leverage. Despite Satyam’s low revenue base versus large-cap peers, we do not anticipate
any material billing rate pressure given Satyam’s much lower rates. On the contrary, we
expect relatively higher improvement post macro stabilisation.
Reiterate Buy
Given the current elevated macro headwinds, we cut our USD revenue estimates by 5% and
INR EPS by 4% for FY13/FY14. We continue to value Satyam on EV/EBITDA basis given
the high volatility below the EBITDA line from other income, forex gain/loss and tax. We cut
our target price to Rs86 (from Rs94) which implies an FY13F EV/EBITDA of 7.6x, down from
the earlier 8.2x, to maintain the discount of around 35-40% to our industry benchmark
Infosys and around 20% to HCL Tech (to factor in lower revenue and EBITDA margins than
Infosys and HCL).
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