Quarter run-rate disappointing; Satyam is still ‘work in progress’:: Elara

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Quarter run-rate disappointing; Satyam is
still ‘work in progress’
Mahindra Satyam came up with their Q1 and Q2 numbers today
which reflected a qoq deterioration in profitability. Most of the fall in
EBITDA margin is related to the 3% onsite and 15% offshore wage
hike that the company has taken in Q2. At the current quarterly runrate,
the Company will at best come up with a flat yoy topline growth,
FY11 over FY10.


Positives from the call
􀂃 Headcount numbers have stabilized for the Company at around
28,000 levels. However attrition (annualized) continues to be at
25% which is marginally above that of midcap IT vendors.
􀂃 With the release of the quarter numbers, Satyam has finally
become “current” in terms of financials and can approach
prospective clients for whom financials are a necessary condition
to be at the bidding rooms. In-line with industry trends, segments
like manufacturing, digital convergence have picked up for
Satyam; Mahindra Satyam currently has 217 active clients.

Negatives from the call
􀂃 Satyam is not yet present in the periphery of larger deals
(>USD25mn). The strategy still remains that of getting into new
accounts and growing into them. This means that the company
will have to depend on existing client ramp up which negates
hopes of a fast recovery on the topline. Renewal rates at 91% are
robust which guarantees the current top line run-rate.
􀂃 Utilization for the company is already at 71% (in line with peers)
which limits the upside from this particular margin lever.
Moreover, with Satyam moving from a rental model to a ‘owned
set-up’ structure, depreciation rates are set to go up.
􀂃 With supply side pressures going up, Mahindra Satyam might
have to take another pay hike if the attrition at 25% does not
come down soon.

Impact on Satyam stock price and read across for our Tech Mahindra
view: Recovery in Satyam’s fortunes are decidedly more pushed out
than current stock price indicates. With the current numbers, visibility
on INR8 as FY12 EPS has gone down. Moreover, management’s
comments seemed to suggest that the Tech Mahindra-Mahindra
Satyam merger is at least another 4 quarters away. While our Sell call
was predicated on core Tech Mahindra worsening, we believe that the
last leg of achieving our target price (another 3% from current levels)
of INR 700 will be propelled by these quarterly numbers.