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Mahindra Satyam (Satyam) reported a reasonable 4.5% QoQ volume
growth in Q2FY12 comparable to tier‐1 peers. Revenue in constant
currency surged 4% QoQ, a tad lower than peers, due to higher offshore
revenue share. Margin improved just 50bps QoQ despite currency boost
due to provision for doubtful debts and higher share of systems
integration revenue. Muted hiring and management commentary on
large deal ramp ups delay hint at muted performance in the near term.
The stock is not under coverage.
Volumes surge, but margin disappoints
Satyam’s Q2FY12 revenue at INR15.8bn grew 10% QoQ partly aided by better realised
exchange rate and hardware/software licence purchases for certain projects. In
constant currency, it reported 4% QoQ revenue growth driven by 4.5% QoQ volume
surge. EBITDA margin improvement of just 50bps QoQ was disappointing, despite
benefiting from 6.7% higher QoQ realised exchange rate. Margin was impacted by
higher share of India business, hardware/software licence purchases, visa expenses
and provision for doubtful debts. Net profit at INR2.4bn grew just 5.8% QoQ despite
forex gain of INR337mn as tax rate surged to 19.5% from 15.9% in Q1FY12.
Commentary on near‐term business less optimistic
The company reported 6% QoQ growth (nearly double its average growth rate) in USD
terms in top 20 clients. Yet, Satyam’s commentary on near‐term performance was less
optimistic. It stated some delays in ramp up of large deals, especially in Europe. It hired
650 people (2% QoQ growth in headcount) during the quarter, mostly laterals, and
stated that it is focusing on just‐in‐time hiring. It also highlighted that since 52% of
revenue came from time & material based pricing projects, fewer working days in
Q3FY12 are likely to impact growth. It expects margin to be impacted by 250‐300bps in
Q3FY12 due to salary hikes, which are effective October 2011.
Outlook and valuations: Building back gradually; NOT RATED
Satyam’s Q2FY12 performance is reasonable. While margin will decline in Q3FY12 due
to salary hikes, it is focused on improving margin in the future. The Street is estimating
INR8.7bn EBITDA in FY12 compared to INR4.5bn in H1FY12. Hence, there will likely be
upgrades. It is trading at 11x FY12E earnings. The stock is not under our coverage.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Mahindra Satyam (Satyam) reported a reasonable 4.5% QoQ volume
growth in Q2FY12 comparable to tier‐1 peers. Revenue in constant
currency surged 4% QoQ, a tad lower than peers, due to higher offshore
revenue share. Margin improved just 50bps QoQ despite currency boost
due to provision for doubtful debts and higher share of systems
integration revenue. Muted hiring and management commentary on
large deal ramp ups delay hint at muted performance in the near term.
The stock is not under coverage.
Volumes surge, but margin disappoints
Satyam’s Q2FY12 revenue at INR15.8bn grew 10% QoQ partly aided by better realised
exchange rate and hardware/software licence purchases for certain projects. In
constant currency, it reported 4% QoQ revenue growth driven by 4.5% QoQ volume
surge. EBITDA margin improvement of just 50bps QoQ was disappointing, despite
benefiting from 6.7% higher QoQ realised exchange rate. Margin was impacted by
higher share of India business, hardware/software licence purchases, visa expenses
and provision for doubtful debts. Net profit at INR2.4bn grew just 5.8% QoQ despite
forex gain of INR337mn as tax rate surged to 19.5% from 15.9% in Q1FY12.
Commentary on near‐term business less optimistic
The company reported 6% QoQ growth (nearly double its average growth rate) in USD
terms in top 20 clients. Yet, Satyam’s commentary on near‐term performance was less
optimistic. It stated some delays in ramp up of large deals, especially in Europe. It hired
650 people (2% QoQ growth in headcount) during the quarter, mostly laterals, and
stated that it is focusing on just‐in‐time hiring. It also highlighted that since 52% of
revenue came from time & material based pricing projects, fewer working days in
Q3FY12 are likely to impact growth. It expects margin to be impacted by 250‐300bps in
Q3FY12 due to salary hikes, which are effective October 2011.
Outlook and valuations: Building back gradually; NOT RATED
Satyam’s Q2FY12 performance is reasonable. While margin will decline in Q3FY12 due
to salary hikes, it is focused on improving margin in the future. The Street is estimating
INR8.7bn EBITDA in FY12 compared to INR4.5bn in H1FY12. Hence, there will likely be
upgrades. It is trading at 11x FY12E earnings. The stock is not under our coverage.
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