Tech Mahindra:Satyam results disappoint: Nomura

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􀁾 Action
We have cut our consolidated EPS estimates for Tech Mahindra, which owns
42.7% of Satyam, by about 15% after the disappointing Satyam results. Satyam
disappointed especially on the margins front, which we now think will improve at a
slower pace than earlier anticipated. We maintain NEUTRAL on Tech Mahindra
with a reduced PT of Rs690. Mphasis is our top pick among mid-cap IT stocks.

􀁡Catalysts
Announcement of a merger with Satyam at a favourable swap ratio can be a nearterm
upside trigger for Tech Mahindra.

Anchor themes
Expect discount to larger peers to continue on lower growth and Mahindra
Satyam’s financials confirming our view that mid-cap IT companies would face
higher supply side pressures compared to larger peers.




Satyam results disappoint
􀁣 FY11F revenue and margins to be lower than FY10
Satyam (SCS IN; Not rated; INR74.40) reported 1HFY11 revenues of
US$541mn – which was 6% lower than our estimate. We now look for
FY11F revenue of US$1103mn or an annual decline of 4.6%. Margins
are likely to witness a similar trend and we expect FY11F EBITDA
margin of 7.1% on the back of 7.8% in 1HFY11. Satyam posted FY10
margins of 8.3%.

􀁤 Satyam margins likely to take longer to improve
The major disappointment in Satyam’s result is the likelihood of only a
gradual improvement in margins, in our view. Higher onsite effort mix
and utilisation at 71% suggests to us that the primary margin lever
available to Satyam is volume growth. On our estimates, Satyam will
achieve 15% EBITDA margin only by FY13F, which is a lag of one
year compared to our initial expectations.

􀁥 Reducing Satyam FY12F EPS to 4.3
We have reduced our revenue and margin estimates for Satyam and
now look at an EPS of Rs4.3 in FY12F (35% lower than our previous
estimate) and a sub-Rs6 EPS in FY13F. We have assumed 15% US$
revenue CAGR over FY12-13, with EBITDA margins improving from
7.1% in FY11F to 15% in FY13F.

􀁦 Maintain NEUTRAL and reduce PT to Rs690
We reduce our PT for Tech Mahindra to Rs690 from Rs760 primarily
on account of moderation of our expectations for revenue and margin
improvement at Satyam. We maintain NEUTRAL on the Tech
Mahindra. Mphasis (MPHL IN; BUY; INR580.15) is our top pick
among mid-cap IT stocks.