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UBS Investment Research
Mahindra Satyam
Turnaround likely to be impeded
[ EXTRACT]
Turnaround could be delayed due to demand slowdown
Revenue growth for Mahindra Satyam (Satyam) has picked up over the past two
quarters, with average volumes increasing 3.5% QoQ. However, we believe growth
is likely to be delayed in the medium term due to the macroeconomic slowdown in
the US and Europe, which account for 80% of revenue.
Margin recovery could also be slower
We have assumed an operating margin of 14% for FY12 and expect it to remain
stable at this level over the medium term. However, this would be below
management’s target of the 15-20% industry range.
Merger mechanics to remove overhang on the stock
We believe the dynamics of the merger with Tech Mahindra could be a downside
risk to the share price if the merger ratio is unfavourable to Satyam’s minority
shareholders. We wait for further clarity on the joint go-to-market strategy of the
company post full integration.
Valuation: maintain Sell rating, raise price target from Rs65 to Rs70
We raise our FY12/13/14 EPS estimates from Rs3.58/4.71/5.79 to
Rs6.64/6.34/7.13. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Our price
target assumes a 12% WACC and 3% terminal growth, and implies an FY13E PE
multiple of 10.7x.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Mahindra Satyam
Turnaround likely to be impeded
[ EXTRACT]
Turnaround could be delayed due to demand slowdown
Revenue growth for Mahindra Satyam (Satyam) has picked up over the past two
quarters, with average volumes increasing 3.5% QoQ. However, we believe growth
is likely to be delayed in the medium term due to the macroeconomic slowdown in
the US and Europe, which account for 80% of revenue.
Margin recovery could also be slower
We have assumed an operating margin of 14% for FY12 and expect it to remain
stable at this level over the medium term. However, this would be below
management’s target of the 15-20% industry range.
Merger mechanics to remove overhang on the stock
We believe the dynamics of the merger with Tech Mahindra could be a downside
risk to the share price if the merger ratio is unfavourable to Satyam’s minority
shareholders. We wait for further clarity on the joint go-to-market strategy of the
company post full integration.
Valuation: maintain Sell rating, raise price target from Rs65 to Rs70
We raise our FY12/13/14 EPS estimates from Rs3.58/4.71/5.79 to
Rs6.64/6.34/7.13. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. Our price
target assumes a 12% WACC and 3% terminal growth, and implies an FY13E PE
multiple of 10.7x.
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