Hold Mahindra Satyam; target of Rs 80: Emkay

Emkay Global Financial Services has recommended hold rating on Mahindra Satyam with a target of Rs 80, in its May 17, 2012 research report.

“Mahindra Satyam reported revenues at US$ 337 mn (+3.7% QoQ) with margins improving by ~130 bps sequentially to 17.5% , highest since MSat’s takeover by Tech M (note that Mah Satyam has improved margins in every single qtr through FY12), however were aided by substantial one time costs reversals and reduction in lease rentals. Reported profits at Rs 5.3 bn (+73% QoQ) came in significantly above estimates aided by further cost writebacks of Rs 1.1 bn and tax benefits of ~Rs 1.6 bn. Headcount addition during the quarter was healthy at ~1,073 taking the total employee count to ~33, 353. Op metrics performance remained mixed with growth from US rebounding after sharp decline in Dec’11 qtr, albeit Financial Services revenues declined by ~6.6% QoQ after strong performances in the recent qtrs. Revenues from top client declined by ~6% QoQ however top 5/20 clients grew at 3.3%/5.1% QoQ aided by ~10% QoQ growth in top 2-5 client bracket.”
“Although MSat management indicated that it hopes to grow in line with industry growth prospects, it indicated that it pointed out the global macro uncertainty was talking a toll on discretionary spending( we note that Enterprise Services at >40% of MSat’s services portfolio could be driving caution). The deal pipeline remains healthy as per company however is coming under greater scrutiny given the demand weakness. Management indicates of continued focus on client mining with top 20 clients growing by ~19% YoY in FY12.”
“Lower currency resets to Rs 51/$ and Rs 50/$ in line with our economist’s revised currency assumptions (V/s Rs 49.5/$ and Rs 48/$ earlier) drive a 8.6%/15% raise in our FY13/14E earnings to Rs 8.5/9.2 respectively. Given a 15% correction in the stock price and valuations at <8x FY13/14 P/E, which appear attractive vis a vis mid tier peers who have attracted decent investor interest in the recent past aided both by better op performance (V/s Tier I peers) and INR weakness, we would not rule out a positive rub off on both Mahindra Satyam and Tech M (note that fortunes for the two stocks remain completely linked given the impending merger). We retain HOLD on both Mah Satyam (TP Rs 80) and Tech M (TP Rs 650) and would review ratings and TP post Tech M results,” says Emkay Global Financial Services research report.   Non-Institutions holding more than 90% in Indian cos Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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