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Satyam 2Q ahead of expectations; Maintain Reduce on TechM
Mahindra Satyam (SCS IN, not rated) reported US$ revenue growth of
3.2% q-q, EBITDA margin improvement of 50bp q-q to 15.3%, and PAT
of Rs2.38bn. The revenue growth rate was slightly lower than our
expectation (of 5%), although the standalone entity grew faster at 4.3%
q-q. The results were ahead of our expectation on margins and PAT
driven by 1) higher rupee realized rate of 47.8 (compared to average
USD/INR rate of 45.8 for 2Q); and 2) higher other income. We expect
marginal revisions to our Tech Mahindra FY13F estimates. Tech
Mahindra owns 42.7% of Mahindra Satyam.
Muted margin improvement despite gains in rupee realization
Satyam’s EBITDA margins improved by only 50bps q-q despite 6.6% q-q
benefit from the rupee realized rate (47.8 for 2Q compared to 44.8 in
1Q). While gross margins improved by 410bps q-q, a 360bp q-q increase
in operating expenses (as a percentage of revenues) offset a large part
of the gains. Management attributed the rise in operating expenses to
1) travel/visa/conveyance related expenditure; 2) hardware and software
license-related costs; and 3) provision for bad debts. In 2Q, there was
about Rs250-300mn in costs related to deployment of hardware and
software licenses.
Salary hikes expected to impact Satyam’s 3Q margins by 250-
300bps
For 3Q, management expects wage hikes (12% offshore and 2.5%
onsite), which kicked in from 1 October, 2011, to have an impact of 250-
300bps on margins. Employee pyramid optimization and utilization
improvement are some of the levers the company would use to soften
the margin impact of wage hikes. The employee pyramid has seen good
improvement; the 0-3 year experienced employee proportion of the
employee base increased by 900bps to 27% in 2QFY12.
Pipeline improves, but large deals are getting delayed, especially
in Europe; no pressure on pricing
Satyam has seen an improvement in deal pipeline, with more large
deal invitations over the past 2-3 quarters. However, management
expressed concern over delays in progression of large deals from
stage to stage. Large deals, in Europe especially, are getting delayed
according to management. The delays in large deals are mostly in the
transformational programs where the payback period is long. Many
such deals are being split into smaller deals, with shorted payback
periods.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Satyam 2Q ahead of expectations; Maintain Reduce on TechM
Mahindra Satyam (SCS IN, not rated) reported US$ revenue growth of
3.2% q-q, EBITDA margin improvement of 50bp q-q to 15.3%, and PAT
of Rs2.38bn. The revenue growth rate was slightly lower than our
expectation (of 5%), although the standalone entity grew faster at 4.3%
q-q. The results were ahead of our expectation on margins and PAT
driven by 1) higher rupee realized rate of 47.8 (compared to average
USD/INR rate of 45.8 for 2Q); and 2) higher other income. We expect
marginal revisions to our Tech Mahindra FY13F estimates. Tech
Mahindra owns 42.7% of Mahindra Satyam.
Muted margin improvement despite gains in rupee realization
Satyam’s EBITDA margins improved by only 50bps q-q despite 6.6% q-q
benefit from the rupee realized rate (47.8 for 2Q compared to 44.8 in
1Q). While gross margins improved by 410bps q-q, a 360bp q-q increase
in operating expenses (as a percentage of revenues) offset a large part
of the gains. Management attributed the rise in operating expenses to
1) travel/visa/conveyance related expenditure; 2) hardware and software
license-related costs; and 3) provision for bad debts. In 2Q, there was
about Rs250-300mn in costs related to deployment of hardware and
software licenses.
Salary hikes expected to impact Satyam’s 3Q margins by 250-
300bps
For 3Q, management expects wage hikes (12% offshore and 2.5%
onsite), which kicked in from 1 October, 2011, to have an impact of 250-
300bps on margins. Employee pyramid optimization and utilization
improvement are some of the levers the company would use to soften
the margin impact of wage hikes. The employee pyramid has seen good
improvement; the 0-3 year experienced employee proportion of the
employee base increased by 900bps to 27% in 2QFY12.
Pipeline improves, but large deals are getting delayed, especially
in Europe; no pressure on pricing
Satyam has seen an improvement in deal pipeline, with more large
deal invitations over the past 2-3 quarters. However, management
expressed concern over delays in progression of large deals from
stage to stage. Large deals, in Europe especially, are getting delayed
according to management. The delays in large deals are mostly in the
transformational programs where the payback period is long. Many
such deals are being split into smaller deals, with shorted payback
periods.
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