Buy Mahindra Satyam; target of Rs 103: BP Equities

“Mahindra Satyam delivered decent performance in Q3 FY12, with revenues coming in line but profits coming well above ours as well as street’s expectations. Margins expanded in the quarter despite salary hikes effective in the quarter offset by significant rupee deprecation. The company registered 8.3%/3.5% growth in Top/Top10 clients accounts which appears positive, we believe that the company is strongly moving on its path to recovery. However, concerns remain over lower clarity on some additional pending cases and expected date of merger with the parent company though management indicated that merger will take place till 2012 end.”

“Mahindra Satyam revenues in US$ terms de grew 1.6% Q-o-Q to US$ 325 mn (lower than our expectation of $340 mn) due to volumes decline of 1.3% q-o-q, cross currency impact of 1.4% offset by 1.1% gain from realization rates. Revenue in INR terms stood at Rs 17,181 mn up 8.9% q-o-q and 34.3% y-o-Y aided by significant INR depreciation and higher rupee realization (USD/INR realization at Rs 52.9/$ as compared to average of Rs 51.3/$ for peers). The company added 188 employees in the quarter (mainly laterals) taking the total employee count to 32,280. Adjusted Net profit came in at Rs.3.08 bn, up 29.5% sequentially and 174.9% Y-o-Y (ahead of expectations) driven by higher other income (had a forex gain of Rs 664 mn in the quarter), higher margins and rupee depreciation. Adjusted EPS for the quarter stood at Rs 2.62, as against Rs 2.03 in the last quarter."

"EBITDA margin expanded 978 bps Y-o-Y and 87 bps Q-o-Q to 16.2% in the quarter, despite significant Salary hikes given (12-14% offshore and 2-3% onsite), due to ~11% INR deprecation, continued off shoring (expanded 100 bps jump in offshore revenue to 49%). Employee cost stood at 60.9% of revenues (vs 71.05% in Q3 FY11) largely in line with Tier-I peers however SG&A expenses at 22.9% of sales is still higher than that of Tier-I peers, which we don't expect to decline going forward. Going forward we don't see significant expansion in margins levels for FY12E however higher utilization, stable pricing, increased fresher's hiring (~2,300 fresher's expected to join in FY13E) and dip in attrition could boost margins for FY13E. The Adjusted NPM expanded 285 bps q-o-q and 918 bps y-o-y to 18.0%, primarily due to higher other income( due to forex gains).”

“In view of company’s improving operational efficiency, increase in business from Top clients, aggressive fresher's hiring for FY13E, expansion in margins, return of old customers and addition of new clients, significant deal wins and efficient settlement of almost all major pending law suits, we remain bullish on Mahindra Satyam. Our top line revenue estimate stands at Rs 64.2 bn and Rs 75.2 bn up 24.9% and 17.1% Y-o-Y for FY12E and FY13E respectively. We improve our EBITDA margins targets and now expect it to stand at 15.2% and 16.4% for FY12E and FY13E respectively (in line with industry average). The stock is trading at a P/E of 8.4x and 7.8x FY12E and FY13E earnings. We reiterate our “BUY” rating on the stock and maintain our price target of Rs 103 ~11x times FY13E earnings,” says BP Equities research report.

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