Mahindra Satyam - Cautious on margin expansion; retain U/P „:: BofA Merrill Lynch,

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Mahindra Satyam Ltd
   
Cautious on margin expansion;
retain U/P
„Revenue growth to lag peers; retain Underperform
While 1Q results were ahead of our estimates, retain Underperform rating given
our view that revenue growth likely to lag peers given exposure to slower growing
verticals such as manufacturing/ telecom and our view that current margin levels
unlikely to sustain given relatively higher impact from wage hikes than peers. We
raise FY12 earnings by 24% to a) factor 1Q margin beat & likely benefit from push
out of wage hike to 3Q, b) higher other income during 1Q and lower tax
assumption as guided by management now. Retain FY13E/14E and PO of Rs78.
1Q margins better than expected; unlikely to sustain
1Q margins expanded by 170bps QoQ, 120 bps ahead of our estimate driven by
revenue growth and improvement in employee pyramid levels. With offshore
salary cost estimated to be at 50% of salaries vs. 40% for peers, we believe
impact of wage hike is likely to be higher than peers.  Remain cautious on
sustainability of margins for Satyam.
Profits helped by higher other income/ lower tax
Profit during the quarter declined 8% QoQ and was 44% ahead of our estimate.
This was largely driven by higher other income (including forex gains) and lower
tax rates during the quarter. Expect other income levels to moderate due to
potential cash payout for Upaid (USD70mn) in 2Q. Tax rates though likely to be at
18% vs. 24% guided earlier given benefits from unabsorbed losses.
Plans to wind down ADS program
Satyam also announced that it plans to wind-down its ADS program in 2012 as it
would face cancellation of its registration given it failed to meet US regulatory
norms. It hopes to complete the wind-down over the next seven months.