Accumulate Mahindra Satyam; target of Rs 123: KRChoksey

KRChoksey is bullish on Mahindra Satyam and has recommended accumulate rating on the stock with a target of Rs 123 in its October 31, 2012 research report.

“Mahindra Satyam revenue increased by 3.2% QoQ in constant currency terms (in-line with our expectation) supported by strong traction registered in US geography for the second consecutive quarter. The company’s growth rate in H2 FY13 is more or less in line with peer sets, which is impressive, considering the fact that it derives around 40% of its revenue from ERP and the spend on the same by clients is trickling down due to adverse macroeconomic environment. The management has witnessed increase in deal pipeline compared to the previous quarter; especially in US geography. However, they expressed concern that they are witnessing sluggishness in deal closure due to macro economic uncertainty globally and the companies such as Satyam which are doing catch-up to peers are more susceptible to this trend.”

“EBITDA margin declined by 15 bps QoQ to 21.5% in Q2 FY13 against our estimates of dip in EBITDA margin by 217 bps QoQ. The margin came better than our expectation primarily due to two reasons (1) Quantum of wage hike announced by the company was lower than our expectation i.e. 6% for offshore and 1.5% for onsite against our projection of 8% for offshore employees and 3% for onsite employees and (2) Sub-contract cost as percentage of sales came down by 120 bps QoQ to 4.6% in Q2 FY13 against our expectation of increase by 10 bps QoQ as percentage of sales.”

“Taking into account higher than expected EBITDA margins for the second consecutive quarter and scope to improve margin further (excluding currency movement), we raise our FY13E and FY14E EPS estimates by 10% and 9%, respectively, and upgrade our recommendation on the stock to “accumulate” from “hold” with a price target of Rs. 123 by assigning multiple of 11 times to its FY14E EPS of Rs. 11.2,” says,” says KRChoksey research report.

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