Mahindra Satyam Outlook ::Deutsche Bank

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Mahindra Satyam
Outlook
We rate Mahindra Satyam (MSat) Hold with a target price of INR90. We believe the
announcement of the revised financials has gone a long way to rebuild client
confidence in the company. With the prospect of strong improvement in new client
wins and broad-based exposure to existing clients, we expect the company to report a
15.5% revenue CAGR over FY12-14E. This should improve employee utilisation and help
Satyam substantially raise its very low margin. We thus expect the company to report
an earnings CAGR of 27% over the same period. In spite of the near resolution of the
most cases pending against the company and no perceived incremental adverse impact
on its financial health, we retain our Hold rating since the stock has outperformed the
Sensex by 25% ytd and we believe our target price adequately reflects the lowered risk
profile of the company.
Valuation
With MSat’s announcement of its audited and re-stated financials, thereby making it
current with respect to financial reporting, we believe it is appropriate to value the
company. In line with peers, we value MSat on a one-year forward P/E basis. Although
it has better capability, Satyam's current revenue profile puts it in line with the valuation
of other mid-cap companies, in our opinion. Thus, disregarding the company's high
earnings potential and taking cognizance of the overhang from contingent liabilities, we
value the company at 10x FY13E. Our target P/E multiple is based on the average of
FY13E P/E multiples at which comparable mid-cap IT services companies are trading in
the Indian market.
Risks
Key upside risks to our Hold rating include: (1) A better-than-expected turnaround in
revenue growth and margin trajectory, (2) amicable resolution of the outstanding
disputes with minimum damage to the financial health of the company and (3) a sharp
pickup in discretionary spending in the package implementation segment, in which the
company has a dominant presence. Key downside risks to our Hold rating include: (1)
pressure on billing due to lower rates negotiated during the re-building period, (2)
continuation of client attrition and poaching of the highly skilled package
implementation resources, (3) significantly higher liability from lawsuits and (4) extreme
volatility in currency-denting margins and a longer-than-expected global downturn
prolonging the recovery for the industry in general and the company in particular.