Hold Mahindra Satyam; target of Rs 90: KRChoksey

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Hold Mahindra Satyam; target of Rs 90: KRChoksey

KRChoksey has recommended hold rating on Mahindra Satyam with a target of Rs 90, in its August 11, 2011 research report.

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RELATED NEWS Buy M&M; target of Rs 806: Motilal Oswal Buy PVR; target of Rs 144: ICICIdirect.com Buy DCB; target of Rs 68: Nirmal Bang ALSO READ See previous views by KRChoksey See what other Experts & Brokerages are saying about Mahindra Satyam See messages about Mahindra Satyam Mahindra Satyam BSE | NSE 01/06/12 Are Mutual Funds betting on Mahindra Satyam?

KRChoksey has recommended hold rating on Mahindra Satyam with a target of Rs 90, in its August 11, 2011 research report.

"Mahindra Satyam, Revenue increased by 5.3% QoQ (in USD terms) to USD 320 million in Q1FY12. The revenue growth was primarily led by increase in volume by 3.9% QoQ in Q1FY12 and favorable cross currency movement. The billing rate on like to like basis was stable. The volume growth was led by strong traction in top 20 clients in Q1FY12. We believe the primary reason for the same is lifting of embargoes (put in place on disclosure of fraud by the previous management) by existing clients on settlement of key litigation such as Civil action suit and disclosure of financials as per Indian GAAP."

"The company is registering strong traction in its core strength areas i.e. ERP and Product Engineering services. However, expressed concern that sales cycle for discretionary spends getting prolonged due to on-going macro uncertainty which might affects its ability to register industry leading revenue growth in near term. EBITDA margin increased by 168 bps QoQ to 14.6% in Q1FY12 more or less in line with our expectation. The improvement in EBITDA margin was supported by widening of employees pyramid (out of net hiring of 2,212 employees in Q1FY12 around 1,300 were freshers taking total employee base to 31,438), increase in share of offshore mix by 1% QoQ to 47%, favorable cross currency movement and operating leverage. The net profit margin in Q1FY12 came significantly higher than our expectation supported by decline in depreciation to Rs. 38 crore in Q1FY12 as against Rs. 44.3 crore in Q4FY11, increase in forex gain from Rs. 16.9 crore in Q4FY11 to Rs.25.2 crore in Q1FY12 and lower than expected tax rate i.e. 16% against our assumption of 26% in Q1FY12. The company has announced wage hike of around 12% for offshore based employees and 2.5% for onsite employee-base w.e.f. October 2011 having impact of around 250 bps on EBITDA margins."

"Considering, the management concerns of slowdown in sales cycle for discretionary spend which constitute major portion of the company's revenue impacting the company's ability to significantly outperform industry's average growth rate in FY12E, we maintain our "HOLD" recommendation on the stock with price target of Rs.90 per share by assigning P/E of 12 times to its FY13E EPS of Rs.7.5," says KRChoksey research report.

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