mahindra satyam, 4th february, 2013

7/29/2019 Mahindra Satyam, 4th February, 2013

1/12

Please refer to important disclosures at the end of this report 1

EBITDA 418 417 0.3 278 50.5

EBITDA margin (%) 21.6 21.5 5bp 16.2 539bp

Source:Company, Angel Research; Note: * excluding exceptional items

Mahindra Satyam (Satyam) reported broadly in-line set of results for 3QFY2013

on the revenue as well as operational front but the bottom-line disappointed due

to exceptional loss of `294cr because of Aberdeen claim settlement. Volume

growth was decent at 1.5% qoq. The company added 33 new clients during the

quarter. Satyam has successfully addressed its key concern areas in the past three

years of client mining, employee retention, margin expansion, and dispute

resolution. The company is back on its growth track after three years of

metamorphosis undertaken by Tech Mahindras Management post its acquisition

in June 2009.

For 3QFY2013, Satyam reported revenue of US$356mn, up

0.6% qoq. In INR terms, the revenue came in at `1,940cr, almost flat qoq. The

companys EBITDA margin remained almost flat qoq at 21.6%, aided by

provision reversal of ~`35cr. Adjusted PAT came in at `374cr, up 35% qoq,

aided by other income of `111cr as against nil in 2QFY2013.

Mahindra Satyam indicated that it sees better revenuegrowth in FY2014 aided by decent logo wins (it won two Fortune 500 logos and

two Forbes Global 2000 logos during the quarter) and healthy deal pipeline

across verticals such as manufacturing, retail and healthcare. It mentioned that

there is a definite improvement in the number of deals that the company is getting

invited for and distinct uptick has been seen in the win ratios vs a year ago. We

expect the company to post a 9.7% and 15.1% CAGR in USD and INR revenue,

respectively, over FY2012-14E. The Management indicated that the proposed

Tech Mahindra - Satyam merger has been approved by the Bombay High Court,

while it awaits the Andhra Pradesh High Court approval. On the EBITDA front, the

company is expected to post a 27.9% CAGR over FY2012-14E.

% chg (37.8) (6.1) 24.3 20.6 9.8

% chg (258.2) 68.9 142.4 10.2 1.2

EBITDA margin (%) 8.3 8.8 16.0 21.6 19.8

P/E (x) 48.0 28.5 11.8 13.8 10.6

P/BV (x) 3.0 8.2 4.7 3.3 2.5

RoE (%) 6.3 28.6 40.1 30.6 23.7

RoCE (%) 4.1 7.4 19.0 25.4 20.6

EV/Sales (x) 2.2 2.2 1.8 1.4 1.2

EV/EBITDA (x) 26.2 25.0 11.0 6.5 6.1

Source: Company, Angel Research; Note: *Excluding exceptional items

CMP `120

Target Price `126

Investment Period 12 Months

Stock Info

Sector

Net debt (`cr) (3,310)

Bloomberg Code SCS@IN

Shareholding Pattern (%)

Promoters 42.6

MF / Banks / Indian Fls 8.5

FII / NRIs / OCBs 27.8Indian Public / Others 21.1

Abs. (%) 3m 1yr 3yr

Sensex (0.4) 7.2 12.7

Mahindra Satyam 9.9 63.2 20.4

Face Value (`)

IT

Avg. Daily Volume

Market Cap (`cr)

Beta

52 Week High / Low

14,112

0.7

2

125/64

BSE Sensex

Nifty

Reuters Code

19,895

6,035

SATY.BO

957,647

+91 22 39387800 Ext: 6819

[email protected]

Performance highlights

3QFY2013 Result Update | IT

January 31, 2013


2/12

Mahindra Satyam | 3QFY2013 Result Update

January 31, 2013 2

Exhibit 1:3QFY2013 performance (Consolidated, Indian GAAP)

Direct costs 1,104 1,143 (3.4) 1,046 5.5 3,354 2,938 14.2Gross profit 836 796 5.0 672 24.4 2,403 1,791 34.2

SG&A expenses 417 378 10.2 394 6.0 1,160 1,059 9.6

Dep. and amortization 36 43 (15.6) 39 (6.2) 128 116 10.4

EBIT 382 375 2.1 240 59.6 1,115 616 80.9

Interest charges 3 3 11.3 3 20.7 9 9 0.4

Other income 111 0 151 245 346

PBT 490 372 31.8 388 26.3 1,351 953 41.7

Tax 112 93 21.4 79 42.1 337 179 88.1

PAT 378 279 35.2 309 22.2 1,014 774 31.0

Exceptional item 294 - - 294 -

Minority interest 4 1 160.3 1 442.9 9 2 373.0

Final PAT 80 278 (71.2) 308 (74.1) 710 772 (8.0)

EPS* (`) 0.7 2.4 (71.2) 2.6 (74.1) 6.0 6.6 (8.1)

Gross margin (%) 43.1 41.0 203bp 39.1 398bp 41.7 37.9 387bp

EBITDA margin (%) 21.6 21.5 5bp 16.2 539bp 21.6 15.5 611bp

EBIT margin (%) 19.7 19.3 39bp 13.9 577bp 19.4 13.0 633bp

PAT margin (%) 18.2 14.3 390bp 16.5 174bp 16.7 15.2 152bp

Source: Company, Angel Research; Note: *Excluding exceptional items

Exhibit 2:Actual vs Angel estimates

Net revenue 1,940 1,942 (0.1)

EBITDA margin (%) 21.6 19.9 170bp

PAT 374 277 35.3

Source: Company, Angel Research

In-line operating performance, excluding one-offs

For 3QFY2013, Satyam reported revenue of US$356mn, up 0.6% qoq, majorlyled by a 1.5% qoq volume growth. In INR terms, the revenue came in at `1,940cr,

almost flat qoq. In INR terms, IT services revenue declined by 0.6% qoq to

`1,867cr. BPO reported a 17.9% qoq jump in revenues to `84.4cr, as revenues

from retail clients was driven by the holiday season falling in the quarter, and

Satyam stood to benefit on its account.


3/12


January 31, 2013 3

Exhibit 3:Trend in revenue growth (qoq)


Industry-wise, the companys anchor industry segment, manufacturing, posted a

2.3% qoq decline in revenues due to shutdown at clients sites because of the

holiday season. The companys growth during the quarter was led by the BFSI and

retail & logistics industry segments, the revenue from which grew by 0.5% qoq

each. The technology, media and entertainment (TME) industry segment reported a

4.5% qoq decline in revenues. The company is witnessing IT spending from retail

and manufacturing clients who are focusing on cutting costs and driving

efficiencies. In BFSI, IT spend is coming from areas such as risk, compliance

management and regulatory issues. The company witnessed significant deal

closures in manufacturing as well as in retail industry segments during the quarter.The Management indicated that they are hopeful of pickup in revenue growth in

FY2014 aided by new logo wins and deal wins in manufacturing, retail and

healthcare.

Exhibit 4:Growth in industry segments

Manufacturing 34.0 (2.3) 17.1

TME (includes telecom also) 19.0 (4.5) 10.2

BFSI 20.0 0.5 5.0

Retail and logistics 12.0 0.5 20.2

Healthcare and lifesciences 6.0 0.5 10.2

Others 9.0 29.3 (9.8)


Geography-wise, growth was led by Europe, the revenue from which grew by 9.7%

qoq. Revenue from America was soft with 4.9% qoq decline. RoW witnessed

growth after two consecutive quarters of decline seen in revenues. The

Management indicated that the deal pipeline remains strong from emerging

geographies, where MNCs are trying to expand their footprints.

325

332

342

354356

(1.6)

2.2

2.93.5

0.6

(2)

(1)

0

1

2

3

4

300

310

320

330

340

350

360

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

(%)

(US$mn)

Revenue (US$mn) qoq growth (%)


4/12


January 31, 2013 4

Exhibit 5:Growth trend in geographies

Americas 52.0 (4.9) 14.6

Europe 24.0 9.7 5.8RoW 24.0 4.9 5.8


Hiring and client metrics

During the quarter, the company added 169 net employees, taking its total

employee base to 36,956. The attrition rate of the company remained almost flat

qoq at 13.1%. The Management indicated that most of the hiring done by the

company in this quarter was of freshers. The company has give 2,000 offers to

campus graduates for CY2014 and going ahead lateral hiring will be done

keeping in mind the demand scenario and signs from the macroeconomicenvironment.

Exhibit 6:Employee metrics

Net employee addition 188 1,073 2,643 791 169

Total employees 32,280 33,353 35,996 36,787 36,956

Attrition (%) 16.0 15.0 14.1 13.1 13.1


The companys client metrics saw some qualitative movement with clients gettingadded in higher revenue brackets. The company witnessed addition of one client in

US$20mn-50mn revenue bracket and two clients in US$10mn-20mn revenue

bracket. The total active client base of the company stood at 368 as against 363 in

2QFY2013. Top client metrics of the company remained tardy with non top-10

clients driving revenue performance (up 4.0% qoq) during the quarter. The

revenue from the companys top 5/10 clients declined by 6.6% and 4.3% qoq,

respectively. The company added 33 new clients during the quarter.

Exhibit 7:Client metrics

Total active clients 245 314 372 363 368US$1mn5mn 79 83 94 101 98

US$5mn10mn 14 13 21 23 23

US$10mn20mn 18 17 14 15 17

US$20mn50mn 12 13 12 10 11

US$50mn+ 3 3 4 5 5


Operating margins inch up

During the quarter, the companys EBITDA margin inched up by 5bp qoq to

21.5%, much higher than our estimate. But if we adjust EBITDA margin with one-

off provision reversal of `35.5cr on account of certain approvals accrued towards

employee bonus, EBITDA margin boils down to 19.7%, which is bang in line with

our estimates. The company has been steadily improving its margins by extracting


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January 31, 2013 5

efficiencies. Going ahead, the Management indicated that it will keep focusing on

three margin levers: 1) employee pyramid rationalization, 2) utilization

improvement and 3) G&A efficiencies. However, each of these levers has limited

slack going forward and would not derive any meaningful uptick in operatingmargins from current levels. Margins are expected to be stable in the near term.

Exhibit 8:Margin profile


PAT came in at `80cr, down 71.2% qoq, because the company had an exceptional

loss of `294cr (US$68mn) as Satyam settled its claim with Aberdeen UK. With this

settlement, there are no external India litigations pending against the company.

Excluding one-offs, PAT was higher than our estimates at `374cr, up 35% qoq,

aided by other income of `111cr as against almost nil other income in 2QFY2013.

Outlook and valuation

The new Management has proved its ability of turning around the company in

three years time by putting it back to comparable industry level growth and

improving margins from 8.3% in FY2010 to 16.0% in FY2012 and 21.6% in

3QFY2013. The Management indicated at an improving large-deal pipeline and

growing participation in large RFPs. Mahindra Satyam indicated that it sees better

revenue growth in FY2014 aided both by decent logo wins (it won two Fortune 500

logos and two Forbes Global 2000 logos during the quarter) and healthy dealpipeline across verticals such as manufacturing, retail and healthcare. It mentioned

that there is a definite improvement in the number of deals that the company is

getting invited for and distinct uptick has been seen in the win ratios vs a year ago.

Satyam has successfully addressed its key concern areas in the past three years of

client mining, employee retention, margin expansion, and dispute resolution.

Satyam has enterprise business solutions (EBS; ~40% of its revenue) and

manufacturing (~34% of its revenue) showing modest traction. The company

expects this service and vertical respectively to bolster growth and help it to track

the industrys growth rate. We expect the companys core competence in EBS to

supplement growth and post a 9.7% and 15.1% CAGR in USD and INR revenue,respectively, over FY2012-14E.

39.1 38.741.1 41.0 43.1

16.2 17.5

21.7 21.5 21.6

13.9 15.0

19.1 19.3 19.7

10

15

20

25

30

35

40

45

3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

(%)

Gross margin EBITDA margin EBIT margin


6/12


January 31, 2013 6

The Management indicated that the proposed Tech Mahindra - Satyam merger

had been approved by the Bombay High Court, while it awaits the Andhra Pradesh

High Court approval. We believe that the settlement of various claims (post

Aberdeen, only claims of Indian Income Tax authority are due), which had been anoverhang on the stock, would be positive.

On the operating front, Satyam scaled up its margins from 8.8% in FY2011 to

16.0% in FY2012 and 21.6% in 3QFY013 on the back of factors such as INR

depreciation and rationalization of employee pyramid (number of employees < 3

years are now at ~33% vs 24% in FY2011). Going ahead, the Management

indicated that it will keep focusing on three margin levers: 1) employee pyramid

rationalization, 2) utilization improvement and 3) G&A efficiencies. However, each

of these levers has limited slack going forward and would not derive any

meaningful uptick in operating margins from current levels. Margins are expected

to be stable in the near term. On the EBITDA front, the company is expected topost a 27.9% CAGR over FY2012-14. At the current market price of `120, the

stock is trading at 10.6x FY2014E EPS of `11.3.

Exhibit 9:Key assumptions

Revenue growth - USD terms (%) 8.2 11.0

Revenue growth - INR terms (%) 20.6 9.8

EBITDA margin (%) 21.6 19.8

EBIT margin (%) 19.4 17.6

Tax rate (%) 25.2 25.5

EPS growth (%) (14.5) 30.3


Exhibit 10:One-year forward PE(x) chart


0

50

100

150

200

250

Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13

(`)

Price 18x 15x 12x 9x 6x


7/12


January 31, 2013 7

Exhibit 11:Recommendation summary

HCL Tech Accumulate 689 765 11.1 20.7 13.0 13.6 1.5 22.9Hexaware Buy 79 118 49.0 19.0 7.4 6.3 0.8 22.0

Infosys Neutral 2,789 - - 28.8 16.1 5.9 2.9 21.3

Infotech Enterprises Accumulate 174 184 5.7 17.4 8.9 10.3 0.6 13.6

KPIT Cummins Buy 112 140 24.8 15.2 8.8 16.9 0.7 20.5

MindTree Accumulate 787 868 10.3 19.3 9.1 17.4 0.9 21.7

Mphasis Accumulate 373 396 6.0 17.5 9.9 0.0 0.8 13.5

NIIT^ Buy 27 36 33.1 10.9 4.4 (2.7) 0.2 14.1

Persistent Neutral 554 - - 24.1 10.3 15.1 1.2 18.0

TCS Accumulate 1,343 1,465 9.1 28.9 17.0 13.3 3.5 29.7

Tech Mahindra Accumulate 999 1,087 8.8 19.0 9.4 6.5 1.8 21.6

Wipro Neutral 411 - - 19.4 14.9 6.8 1.7 17.9

Source: Company, Angel Research; Note: Valued on SOTP basis

Company Background

Mahindra Satyam (erstwhile Satyam Computers) was incorporated by Raju brothers

in 1987, with a strong focus on the manufacturing industry and the enterprise

business solutions vertical. The Mahindra Group acquired Satyam in April 2009

after the erstwhile founders reported financial irregularities in January 2009 and it

is now back on its growth track after two years of metamorphosis undertaken by

Tech Mahindra's Management. The company's new Management took over its

reins and has again put the company on the map of the Indian IT industry (sixth

largest Indian IT services provider) with improved business flow, strong client

mining and better margins.


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January 31, 2013 8

Profit and loss statement (Consolidated, Indian GAAP)

Employee costs 3,981 3,594 3,959 4,474 5,057Gross profit 1,500 1,551 2,437 3,237 3,410

% to net sales 27.4 30.1 38.1 42.0 40.3

SG&A expenses 1,043 1,096 1,413 1,570 1,736

% to net sales 19.0 21.3 22.1 20.4 20.5

% to net sales 8.3 8.8 16.0 21.6 19.8

Dep. and amortization 214 185 158 173 186

% to net sales 3.9 3.6 2.5 2.2 2.2

EBIT 243 270 866 1,494 1,488

% to net sales 4.4 5.3 13.5 19.4 17.6

Interest charges 33 10 12 13 8

Other income 106 294 419 298 322

PBT 315 555 1,273 1,780 1,802

Tax 22 58 85 449 460

% of PBT 7.0 10.4 6.7 25.2 25.5

PAT 293 497 1,188 1,331 1,343

Exceptional item 417 641 (109) 294 -

Minority interest 1 3 (8) 12 8

Final PAT (125) (147) 1,306 1,024 1,335

EPS (`)* 2.5 4.2 10.2 8.7 11.3

Note: * excluding exceptional item


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January 31, 2013 9

Balance sheet (Consolidated, Indian GAAP)

Share capital 235 235 235 235 235Share app. money pending allotment 0 - 0 - -

Reserves and surplus 4,395 1,490 2,752 4,070 5,405

Minority interest 20 23 15 27 35

Loan funds 42 22 23 23 23

Deferred tax liability 4 7 2 - -

Other long-term liability 1 3 3 3

Long term provisions 650 294 294 294

Amt pending investigation suspense 1,230 1,230 1,230 1,230 1,230

Fixed assets 987 881 974 1,011 1,095

Goodwill - 35 35 35 35

Investments 627 - 35 35 40

Deferred tax asset 7 8 170 240 310

Loans and advances - 180 176 176 176

Other current assets - 12 6 6 6

Inventories - 59 15 25 25

Sundry debtors 923 1,126 1,402 1,754 1,948

Cash and bank balances 2,177 2,745 2,852 3,223 3,867

Other current assets 496 877 608 623 727

Loans and advances 385 186 692 1,349 1,688

Less: Current liab. and provisions

Sundry creditors 634 598 662 748

Liabilities 882 895 797 697 587

Provisions 1,540 923 1,014 1,234 1,355

Profit and loss account 2,749 - - - -

Unexplained diff. suspense acc. (net) - - - - -


10/12


January 31, 2013 10

Cash flow statement (Consolidated, Indian GAAP)

Pre tax profit from operations 210 261 855 1,481 1,480

Depreciation 214 185 158 173 186Pre tax cash from operations 424 445 1,012 1,654 1,666

Other income/prior period ad 106 294 419 298 322

Net cash from operations 530 740 1,431 1,953 1,989

Tax 22 58 85 449 460

Cash profits 507 679 1,354 1,492 1,521

(Inc)/dec in current assets 507 (445) (468) (1,035) (637)

Inc/(dec) in current liabilities (445) 30 (43) 183 97

Net trade working capital 62 (415) (511) (851) (540)

(Inc)/dec in fixed assets 38 (79) (251) (210) (270)

(Inc)/dec in investments (627) 627 (35) - (5)

(Inc)/dec in deferred tax (1) 1 (167) (72) (70)

(Inc)/dec in other non-current assets (124) 3,210 (351) 12 8

Inc/(dec) in minority interest - (35) - - -

Inc/(dec) in debt (772) (20) 1 - -

Inc/(dec) in equity/premium 2,593 (3,399) 66 - -

Dividends - - - - -

Cash generated/(utilized) 1,676 568 107 371 644

Cash at start of the year 501 2,177 2,745 2,852 3,223


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January 31, 2013 11

Key ratios

P/E (on FDEPS) 28.5 11.8 13.8 10.6 28.5P/CEPS 376.7 9.6 11.8 9.3 376.7

P/BVPS 8.2 4.7 3.3 2.5 8.2

Dividend yield (%) - - - - -

EV/Sales 2.2 1.8 1.4 1.2 2.2

EV/EBITDA 25.0 11.0 6.5 6.1 25.0

EV/Total assets 3.1 2.5 1.9 1.4 3.1

EPS 4.2 10.2 8.7 11.3 4.2

Cash EPS 0.3 12.5 10.2 12.9 0.3

Dividend - - - - -

Book value 14.7 25.4 36.6 48.0 14.7

Tax retention ratio (PAT/PBT) 0.9 0.9 0.7 0.7 0.9

Cost of debt (PBT/EBIT) 2.1 1.5 1.2 1.2 2.1

EBIT margin (EBIT/Sales) 0.1 0.1 0.2 0.2 0.1

Asset turnover ratio (Sales/Assets) 1.4 1.4 1.3 1.2 1.4

Leverage ratio (Assets/Equity) 2.1 1.5 1.4 1.3 2.1

Operating ROE 28.8 39.8 30.9 23.8 28.8

RoCE (pre-tax) 7.4 19.0 25.4 20.6 7.4

Angel RoIC 29.6 50.9 56.2 44.3 29.6

RoE 28.6 40.1 30.6 23.7 28.6

Asset turnover (fixed assets) 5.8 6.6 7.6 7.7 5.8

Receivables days 80 80 83 84 84

Payable days 64 55 54 54 54


12/12


January 31 2013 12

Research Team Tel: 022 - 3935 7800 E-mail: [email protected] Website: www.angelbroing.com

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Disclosure of Interest Statement Mahindra Satyam

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

mahindra satyam, 4th february, 2013

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