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Mahindra Satyam (SCS)
Technology
Currency drives EBITDA/PAT beat even as revenues disappoint. Satyam’s 2QFY12
looked good on headline numbers, but disappointed on details. Better-than-expected
average Re/US$ realization and higher other income drove 1.5% EBITDA and 15% net
income beat for 2QFY12 even as US$ revenues missed our estimate by 1.8%. Revised
currency assumptions drive a 13/15% increase in our FY2012/13E EPS estimates. We
raise our target price to Rs80/share (from Rs70) and rating to REDUCE (from SELL).
2QFY12 – revenue momentum weakens; currency aids EBITDA; other income aids PAT
Satyam’s 2QFY12 headline performance beat our expectations at the EBITDA and net income level.
However, earnings were weak on composition. Revenues in US$ terms grew just 3.1% qoq to
US$330 mn, missing our estimate by 1.8%. More importantly, this was among the weakest
sequential growth across the industry. Average Re/US$ realization of 47.8 (versus our estimated
46.3) drove beat at the Re revenue and EBITDA level. Satyam indicated that the higher Re
realization was on account of revenue booking skew towards the month of September – we note
that Re had depreciated significantly in September. EBITDA margin of 15.3% for the quarter was
in line with our estimate – this can be seen as a disappointment in the light of 3%+ better Re
realization. Net income for the quarter at Rs2.4 bn came in 15% ahead of our estimate, driven by
modest EBITDA beat as well as higher-than-expected other income. Other income of Rs967 mn
included forex losses of nearly Rs380 mn. The company routed MTM losses on forward covers to
the balance sheet.
Turnaround now behind; company needs to start delivering on ‘business as usual’ parameters
We admit upfront that Satyam’s new management team has surprised us positively with the pace
of turnaround on both revenue growth and margins. Nonetheless, we believe bulk of the
turnaround benefits are now behind us and investment thesis from hereon would depend on the
new Satyam’s ability to deliver on business as usual parameters. In that light, 2QFY12 disappointed
revenue growth as well as the quantum of margin uptick. Revenue growth of a shade over 3%
qoq was weaker than peers and margin improvement of 80 bps qoq was modest given currency
and offshore shift tailwinds and no apparent headwinds. Margins were impacted by a sharp
increase in non-employee expenses – management attributed the same to increased marketing
and visa expenses.
Raise estimates, target price and rating
Revised Re/US$ assumptions drive a 13/15% increase in our FY2012/13E EPS estimates to
Rs7.5/8.1 respectively. We also raise our end-FY2013E target price on the stock to Rs80/share
(Rs70 earlier) and change the rating to REDUCE (from SELL).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra Satyam (SCS)
Technology
Currency drives EBITDA/PAT beat even as revenues disappoint. Satyam’s 2QFY12
looked good on headline numbers, but disappointed on details. Better-than-expected
average Re/US$ realization and higher other income drove 1.5% EBITDA and 15% net
income beat for 2QFY12 even as US$ revenues missed our estimate by 1.8%. Revised
currency assumptions drive a 13/15% increase in our FY2012/13E EPS estimates. We
raise our target price to Rs80/share (from Rs70) and rating to REDUCE (from SELL).
2QFY12 – revenue momentum weakens; currency aids EBITDA; other income aids PAT
Satyam’s 2QFY12 headline performance beat our expectations at the EBITDA and net income level.
However, earnings were weak on composition. Revenues in US$ terms grew just 3.1% qoq to
US$330 mn, missing our estimate by 1.8%. More importantly, this was among the weakest
sequential growth across the industry. Average Re/US$ realization of 47.8 (versus our estimated
46.3) drove beat at the Re revenue and EBITDA level. Satyam indicated that the higher Re
realization was on account of revenue booking skew towards the month of September – we note
that Re had depreciated significantly in September. EBITDA margin of 15.3% for the quarter was
in line with our estimate – this can be seen as a disappointment in the light of 3%+ better Re
realization. Net income for the quarter at Rs2.4 bn came in 15% ahead of our estimate, driven by
modest EBITDA beat as well as higher-than-expected other income. Other income of Rs967 mn
included forex losses of nearly Rs380 mn. The company routed MTM losses on forward covers to
the balance sheet.
Turnaround now behind; company needs to start delivering on ‘business as usual’ parameters
We admit upfront that Satyam’s new management team has surprised us positively with the pace
of turnaround on both revenue growth and margins. Nonetheless, we believe bulk of the
turnaround benefits are now behind us and investment thesis from hereon would depend on the
new Satyam’s ability to deliver on business as usual parameters. In that light, 2QFY12 disappointed
revenue growth as well as the quantum of margin uptick. Revenue growth of a shade over 3%
qoq was weaker than peers and margin improvement of 80 bps qoq was modest given currency
and offshore shift tailwinds and no apparent headwinds. Margins were impacted by a sharp
increase in non-employee expenses – management attributed the same to increased marketing
and visa expenses.
Raise estimates, target price and rating
Revised Re/US$ assumptions drive a 13/15% increase in our FY2012/13E EPS estimates to
Rs7.5/8.1 respectively. We also raise our end-FY2013E target price on the stock to Rs80/share
(Rs70 earlier) and change the rating to REDUCE (from SELL).
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