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http://content.icicidirect.com/mailimages/ICICIdirect_TechMahindraMahindraSatyam_EventUpdate.pdf
Rating .......................................................................................Changed from HOLD to BUY
M a h i n d r a I T ?
The boards of Tech Mahindra (TechM) and Mahindra Satyam (MSat)
announced the much awaited merger timelines yesterday. The merger
would create the fifth largest Indian IT company with pro-forma revenues
of $2.4+ billion and EBITDA of $392 million with employee strength of
75,000 and 347 active clients. The appointed date of the merger is
effective April 1, 2011 while the share swap ratio is 2:17 (i.e. for every 17
shares of Mahindra Satyam two shares of TechM will be issued). The
process would be concluded in six to nine months with all assets and
liabilities consolidated at book value. Though the management declined
to substantiate cost synergy suggesting majority of standardisation is
behind them, we believe rationalisation of employee bench, pyramid mix
(TechM has ~35% in its staff with 0-3 years experience while MSat has
~29%), utilisation & virtualisation of support functions (human resource,
investor relations & legal) could drive incremental synergies. Though
TechM core operations could be feeble, it could be a beneficiary of the
revival in Mahindra Satyam. Our analysis suggests operating and financial
metrics could improve for the merged entity leading to a re-rating.
Consequently, we upgrade TechM to BUY with a price target of | 800.
Other essential highlights:
• Tech Mahindra to issue 10.34 crore shares to Mahindra Satyam
shareholders
• Total 10.4% of Tech Mahindra’s stake in Mahindra Satyam is
transferred to Tech Mahindra benefit trust whereas the remaining
32.1% stands cancelled
V a l u a t i o n
We model pro-forma FY13E revenues of $2.65 billion (| 13,282 crore@ |/$
50) for the merged entity with EBITDA margins of 18.5%. We assume
TechM will repay non-convertible debentures worth | 300 crore due in
FY13E. Noticeably, HCL Tech with FY13E revenues of $4.5 billion and
EBITDA margins of 17.4% is trading at a P/E of 14x our FY13E EPS
estimate of | 35. At the CMP, the merged entity is trading at 8.1x our proforma FY13E EPS estimate of | 84.4 and represents a 42% discount to
HCL Tech’s P/E multiple. Consequently, we have valued the new entity at
9.5x our FY13E EPS estimate and upgraded the stock to BUY from HOLD
earlier. Assuming the swap ratio (8.5:1) parity continues, this implies a
target price of | 94 for Mahindra Satyam.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://content.icicidirect.com/mailimages/ICICIdirect_TechMahindraMahindraSatyam_EventUpdate.pdf
Rating .......................................................................................Changed from HOLD to BUY
M a h i n d r a I T ?
The boards of Tech Mahindra (TechM) and Mahindra Satyam (MSat)
announced the much awaited merger timelines yesterday. The merger
would create the fifth largest Indian IT company with pro-forma revenues
of $2.4+ billion and EBITDA of $392 million with employee strength of
75,000 and 347 active clients. The appointed date of the merger is
effective April 1, 2011 while the share swap ratio is 2:17 (i.e. for every 17
shares of Mahindra Satyam two shares of TechM will be issued). The
process would be concluded in six to nine months with all assets and
liabilities consolidated at book value. Though the management declined
to substantiate cost synergy suggesting majority of standardisation is
behind them, we believe rationalisation of employee bench, pyramid mix
(TechM has ~35% in its staff with 0-3 years experience while MSat has
~29%), utilisation & virtualisation of support functions (human resource,
investor relations & legal) could drive incremental synergies. Though
TechM core operations could be feeble, it could be a beneficiary of the
revival in Mahindra Satyam. Our analysis suggests operating and financial
metrics could improve for the merged entity leading to a re-rating.
Consequently, we upgrade TechM to BUY with a price target of | 800.
Other essential highlights:
• Tech Mahindra to issue 10.34 crore shares to Mahindra Satyam
shareholders
• Total 10.4% of Tech Mahindra’s stake in Mahindra Satyam is
transferred to Tech Mahindra benefit trust whereas the remaining
32.1% stands cancelled
V a l u a t i o n
We model pro-forma FY13E revenues of $2.65 billion (| 13,282 crore@ |/$
50) for the merged entity with EBITDA margins of 18.5%. We assume
TechM will repay non-convertible debentures worth | 300 crore due in
FY13E. Noticeably, HCL Tech with FY13E revenues of $4.5 billion and
EBITDA margins of 17.4% is trading at a P/E of 14x our FY13E EPS
estimate of | 35. At the CMP, the merged entity is trading at 8.1x our proforma FY13E EPS estimate of | 84.4 and represents a 42% discount to
HCL Tech’s P/E multiple. Consequently, we have valued the new entity at
9.5x our FY13E EPS estimate and upgraded the stock to BUY from HOLD
earlier. Assuming the swap ratio (8.5:1) parity continues, this implies a
target price of | 94 for Mahindra Satyam.
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