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  • 7/31/2019 Mahindra Satyam 2QFY2013RU

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

    EBITDA 417 408 2.4 242 72.6

    EBITDA margin (%) 21.5 21.7 (15)bp 15.3 621bp

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

    Mahindra Satyam (Satyam) reported broadly in-line set of results for 2QFY2013,

    with robust operational performance. The major highlight of the result was almost

    flat qoq operating margin despite giving wage hikes 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 2QFY2013, Satyam reported a revenue of US$354mn,

    up 3.5% qoq, led by a 2.8% qoq volume growth. In INR terms, the revenue came

    in at `1,938r, up 3.1% qoq. The companys EBITDA margin remained almost flat

    qoq at 21.5% despite having the negative impact of wage hikes. This was due to

    reduction in sub contracting, visa and travel costs. The PAT came in at `278cr,

    impacted by forex loss of `86cr as against a gain of `66cr in 1QFY2013.

    The management mentioned that there is a definiteimprovement in the number of deals that the company is getting invited for and

    theres been a distinct uptick 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. We expect the companys core

    competence in EBS to supplement growth and post a 10.7% and 12.8% CAGR in

    USD and INR revenue, respectively, over FY2012-14E. The company continued to

    deliver operational exuberance with a healthy volume growth. On the EBITDA

    front, the company is expected to post a 22.2% CAGR over FY2012-14E. We

    value the stock at 11x FY2014E EPS, which gives a target price of `115.

    % chg (37.8) (6.1) 24.3 18.8 7.2

    % chg (258.2) 68.9 142.4 (5.1) 7.9

    EBITDA margin (%) 8.3 8.8 16.0 19.9 18.8

    P/E (x) 43.0 25.6 10.6 11.1 10.3

    P/BV (x) 2.7 7.3 4.2 3.1 2.4

    RoE (%) 6.3 28.6 40.1 27.5 22.9

    RoCE (%) 4.1 7.4 19.0 23.4 19.4

    EV/Sales (x) 1.9 1.9 1.5 1.3 1.1

    EV/EBITDA (x) 23.0 21.8 9.6 6.3 5.9

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

    CMP `108

    Target Price `115

    Investment Period 12 Months

    Stock Info

    Sector

    Net debt (`cr) (2,935)

    Bloomberg Code SCS@IN

    Shareholding Pattern (%)

    Promoters 42.6

    MF / Banks / Indian Fls 8.7

    FII / NRIs / OCBs 26.0

    Indian Public / Others 22.7

    Abs. (%) 3m 1yr 3yr

    Sensex 7.5 3.5 15.9

    Mahindra Satyam 29.9 48.5 5.2

    18,431

    5,598

    SATY.BO

    1,036,082

    BSE Sensex

    Nifty

    Reuters Code

    Face Value (`)

    IT

    Avg. Daily Volume

    Market Cap (`cr)

    Beta

    52 Week High / Low

    12,659

    0.8

    2

    116/62

    +91 22 39387800 Ext: 6819

    [email protected]

    Performance highlights

    2QFY2013 Result Update | IT

    October 30, 2012

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    Mahindra Satyam | 2QFY2013 Result Update

    October 30, 2012 2

    Exhibit 1:2QFY2013 performance (Consolidated, Indian GAAP)

    Direct costs 1,143 1,108 3.1 962 18.8 2,250 1,892 18.9Gross profit 796 772 3.1 616 29.2 1,568 1,120 40.0

    SG&A expenses 378 365 3.8 374 1.2 743 665 11.7

    Dep. and amortization 43 49 (13.3) 40 8.0 92 78 18.7

    EBIT 375 358 4.6 202 85.3 733 377 94.5

    Interest charges 3 3 (6.1) 2 43.6 6 7 (7.9)

    Other income 0 134 97 134 195

    PBT 372 489 (23.9) 297 25.3 861 565 52.3

    Tax 93 133 (30.2) 58 60.0 225 100 124.3

    PAT 279 356 (21.6) 239 16.9 636 465 36.8

    Exceptional item - - - - -

    Minority interest 1 4 (63.6) 1 105.6 5 1 334.1

    Final PAT 278 352 (21.1) 238 16.7 630 463 36.0

    EPS* (`) 2.4 3.0 (21.1) 2.0 16.5 5.4 3.9 35.8

    Gross margin (%) 41.0 41.1 2bp 39.0 202bp 41.1 37.2 389bp

    EBITDA margin (%) 21.5 21.7 (15)bp 15.3 621bp 21.6 15.1 651bp

    EBIT margin (%) 19.3 19.1 27bp 12.8 651bp 19.2 12.5 668bp

    PAT margin (%) 14.3 17.5 (316)bp 14.2 11bp 15.9 14.5 149bp

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

    Exhibit 2:Actual vs. Angel estimates

    Net revenue 1,938 1,929 0.5

    EBITDA margin (%) 21.5 19.6 192bp

    PAT 278 273 1.8

    Source: Company, Angel Research

    Operational exuberance continues

    For 2QFY2013, Satyam reported a revenue of US$354mn, up 3.5% qoq, majorly

    led by a 2.8% qoq volume growth. In constant currency (CC) terms, the USD

    revenue growth was healthy at 3.2% qoq. In INR terms, the revenue came in at

    `1,938cr, up 3.1% qoq. In INR terms, IT services revenue grew by 3.3% qoq to

    `1,879cr while BPO reported a 2.0% qoq revenue growth with revenue coming in

    at `72cr.

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    Mahindra Satyam | 2QFY2013 Result Update

    October 30, 2012 3

    Exhibit 3:Trend in revenue growth (qoq)

    Source: Company, Angel Research

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

    robust 6.7% qoq growth in revenue. The companys growth during the quarter was

    led by the BFSI and retail & logistics industry segments, the revenue from which

    grew by 9.1% and 13.1% qoq, respectively. Industry segments such as technology,

    media and entertainment (TME) and healthcare and lifesciences reported a 1.3%

    and 11.2% qoq decline in revenues. The company is witnessing IT spending from

    retail and manufacturing clients to drive cost efficiency measures. In BFSI, IT spend

    is coming from areas such as risk, compliance management and regulatory issues.

    Exhibit 4:Growth in industry segments

    Manufacturing 34.0 6.7 18.0

    TME (includes telecom also) 21.0 (1.3) 2.8

    BFSI 19.0 9.1 13.6

    Retail and logistics 11.0 13.1 17.7

    Healthcare and lifesciences 7.0 (11.2) (7.5)

    Others 9.0 (19.4) (24.5)

    Source: Company, Angel Research

    Geography-wise, growth was again led by America, the revenue from which grew

    by 5.6% qoq. RoW was soft for the second consecutive quarter, with revenuesdeclining 0.7% qoq in this segment after 1% decline in 1QFY2013. The

    management indicated that the deal pipeline remains strong from emerging

    geographies with MNCs trying to expand their footprints in the same.

    Exhibit 5:Growth trend in geographies

    Americas 54.0 5.6 14.1

    Europe 22.0 3.6 (1.1)

    RoW 24.0 (0.7) 3.4

    Source: Company, Angel Research

    330

    325

    332

    342

    354

    3.2

    (1.6)

    2.22.9

    3.5

    (2)

    (1)

    0

    1

    2

    3

    4

    300

    310

    320

    330

    340

    350

    360

    2QFY12 3QFY12 4QFY12 1QFY13 2QFY13

    (%)

    (US$mn)

    Revenue (US$mn) qoq growth (%)

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    Mahindra Satyam | 2QFY2013 Result Update

    October 30, 2012 4

    Hiring and client metrics

    During the quarter, the company added 791 net employees, taking its total

    employee base to 36,787. The attrition rate of the company declined to 13.1% in

    2QFY2013 from 14.1% in 1QFY2013. The management indicated that most of

    the hiring done by the company in this quarter was of freshers but going ahead

    hiring will be done keeping in mind the demand scenario and signs from the

    macroeconomic environment.

    Exhibit 6:Employee metrics

    Net employee addition 654 188 1,073 2,643 791

    Total employees 32,092 32,280 33,353 35,996 36,787

    Attrition (%) 16.1 16.0 15.0 14.1 13.1

    Source: Company, Angel Research

    During the quarter, the revenue from the companys top 5/10 clients grew by

    7/4% qoq. The company witnessed addition of clients in higher revenue brackets.

    Exhibit 7:Client metrics

    Total active clients 228 245 314 372 363

    US$1mn5mn 77 79 83 94 101

    US$5mn10mn 12 14 13 21 23

    US$10mn20mn 19 18 17 14 15

    US$20mn50mn 13 12 13 12 10

    US$50mn+ 3 3 3 4 5

    Source: Company, Angel Research

    Operating margins surprise positively

    During the quarter, the companys EBITDA and EBIT margin remained almost flat

    qoq and came in at 21.5% and 19.3% respectively, despite giving wage hikes,

    which is a creditable task. This was because of: 1) lower than anticipated wage

    hikes of 1.5% to onsite and 6% to offshore employees as against our expectations

    of 2% onsite and 7.5% offshore and 2) lower subcontracting, travel and visa costs.

    Going ahead, the management indicated that the company will continue to

    exercise levers in order to sustain profitability with key margin levers being

    employee pyramid rationalization and improvement in utilization level.

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    Mahindra Satyam | 2QFY2013 Result Update

    October 30, 2012 5

    Exhibit 8:Margin profile

    Source: Company, Angel Research

    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 21.5% in

    2QFY2013. The companys outlook remained cautious in the turbulent

    environment, as it does not expect to be insulated from turn of events on the

    macro front. However the management indicated that the deal pipeline for the

    company remains quite healthy across verticals such as manufacturing, retail and

    BFSI in the US. 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. 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.

    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 10.7% and 12.8% CAGR in USD and INR revenue,

    respectively, over FY2012-14E.

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

    16.0% in FY2012 on the back of factors such as INR depreciation and

    rationalization of employee pyramid (number of employees < 3 years are now at

    ~32% vs 24% in FY2011). Also, during the current quarter, despite giving wage

    hikes, the company managed to have a flat EBITDA margin qoq which was a key

    positive. Going ahead, the management indicated that the company will continue

    to exercise levers in order to sustain profitability with key margin levers being

    employee pyramid rationalization and improvement in utilization level. On the

    EBITDA front, the company is expected to post a 22.2% CAGR over FY2012-14E.

    At the current market price of `108, the stock is trading at 10.3x FY2014E EPS of

    39.0 39.1 38.741.1 41.0

    15.3 16.217.5

    21.7 21.5

    12.813.9 15.0

    19.1 19.3

    0

    5

    10

    15

    20

    25

    3035

    40

    45

    2QFY12 3QFY12 4QFY12 1QFY13 2QFY13

    (%)

    Gross margin EBITDA margin EBIT margin

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    Mahindra Satyam | 2QFY2013 Result Update

    October 30, 2012 6

    `10.4.

    Exhibit 9:Key assumptions

    Revenue growth - USD terms (%) 9.0 12.4

    Revenue growth - INR terms (%) 18.8 7.2

    EBITDA margin (%) 19.9 18.8

    EBIT margin (%) 17.5 16.5

    Tax rate (%) 26.1 25.0

    EPS growth (%) (5.2) 7.9

    Source: Company, Angel Research

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

    Source: Company, Angel Research

    Exhibit 11:Recommendation summary

    HCL Tech Accumulate 605 648 7.2 18.1 12.6 10.1 1.4 22.0

    Hexaware Buy 109 140 27.8 21.4 9.0 10.9 1.1 23.9

    Infosys Accumulate 2,357 2,573 9.2 30.4 13.7 5.6 2.6 23.1

    Infotech Enterprises Neutral 195 - - 17.3 9.7 11.6 0.7 14.0

    KPIT Cummins Accumulate 123 132 7.6 15.0 10.2 14.5 0.9 19.8

    MindTree Accumulate 661 747 13.0 17.7 8.9 11.6 0.8 19.7

    Mphasis Neutral 383 - - 16.9 10.3 (0.5) 0.8 12.6

    NIIT^ Accumulate 33 36 7.8 11.0 5.2 (1.5) 0.3 14.3

    Persistent Neutral 469 - - 24.6 8.7 15.1 1.0 17.9

    TCS Accumulate 1,309 1,410 7.7 29.1 17.2 12.0 3.6 29.1

    Tech Mahindra Accumulate 934 1046 12.0 17.1 9.4 4.2 1.7 20.5

    Wipro Buy 347 421 21.1 19.3 12.4 7.3 1.4 17.9

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

    0

    20

    40

    60

    80

    100

    120

    140

    160

    180

    200

    Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12

    (`)

    Price 18x 15x 12x 9x 6x

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    Mahindra Satyam | 2QFY2013 Result Update

    October 30, 2012 7

    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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    Mahindra Satyam | 2QFY2013 Result Update

    October 30, 2012 8

    Profit and loss statement (Consolidated, Indian GAAP)

    Employee costs 3,981 3,594 3,959 4,573 5,025Gross profit 1,500 1,551 2,437 3,024 3,115

    % to net sales 27.4 30.1 38.1 39.8 38.3

    SG&A expenses 1,043 1,096 1,413 1,508 1,587

    % to net sales 19.0 21.3 22.1 19.9 19.5

    % to net sales 8.3 8.8 16.0 19.9 18.8

    Dep. and amortization 214 185 158 183 187

    % to net sales 3.9 3.6 2.5 2.4 2.3

    EBIT 243 270 866 1,333 1,341

    % to net sales 4.4 5.3 13.5 17.5 16.5

    Interest charges 33 10 12 12 8

    Other income 106 294 419 228 306

    PBT 315 555 1,273 1,549 1,639

    Tax 22 58 85 404 410

    % of PBT 7.0 10.4 6.7 26.1 25.0

    PAT 293 497 1,188 1,145 1,229

    Exceptional item 417 641 (109) - -

    Minority interest 1 3 (8) 9 4

    Final PAT (125) (147) 1,306 1,135 1,225

    EPS (`)* 2.5 4.2 10.2 9.6 10.4

    Note: * excluding exceptional item

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    Mahindra Satyam | 2QFY2013 Result Update

    October 30, 2012 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 3,887 5,112

    Minority interest 20 23 15 24 28

    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 1,001 1,084

    Goodwill - 35 35 35 35

    Investments 627 - 35 35 40

    Deferred tax asset 7 8 170 250 330

    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 1,728 1,874

    Cash and bank balances 2,177 2,745 2,852 3,079 3,635

    Other current assets 496 877 608 623 727

    Loans and advances 385 186 692 1,330 1,629

    Less: Current liab. and provisions

    Sundry creditors 634 598 677 743

    Liabilities 882 895 797 697 587

    Provisions 1,540 923 1,014 1,216 1,303

    Profit and loss account 2,749 - - - -

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

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    Mahindra Satyam | 2QFY2013 Result Update

    October 30, 2012 10

    Cash flow statement (Consolidated, Indian GAAP)

    Pre tax profit from operations 210 261 855 1,321 1,333

    Depreciation 214 185 158 183 187Pre tax cash from operations 424 445 1,012 1,504 1,520

    Other income/prior period ad 106 294 419 228 306

    Net cash from operations 530 740 1,431 1,732 1,826

    Tax 22 58 85 404 410

    Cash profits 507 679 1,354 1,318 1,412

    (Inc)/dec in current assets 507 (445) (468) (989) (550)

    Inc/(dec) in current liabilities (445) 30 (43) 180 44

    Net trade working capital 62 (415) (511) (809) (506)

    (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) (82) (80)

    (Inc)/dec in other non-current assets (124) 3,210 (351) 9 4

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

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

    Inc/(dec) in equity/premium 2,593 (3,399) 66 (0) -

    Dividends - - - - -

    Cash generated/(utilized) 1,676 568 107 227 556

    Cash at start of the year 501 2,177 2,745 2,852 3,079

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    Mahindra Satyam | 2QFY2013 Result Update

    October 30, 2012 11

    Key ratios

    P/E (on FDEPS) 43.0 25.6 10.6 11.1 10.3P/CEPS 140.7 337.9 8.6 9.6 8.9

    P/BVPS 2.7 7.3 4.2 3.1 2.4

    Dividend yield (%) - - - - -

    EV/Sales 1.9 1.9 1.5 1.3 1.1

    EV/EBITDA 23.0 21.8 9.6 6.3 5.9

    EV/Total assets 1.8 2.7 2.2 1.7 1.3

    EPS 2.5 4.2 10.2 9.6 10.4

    Cash EPS 0.8 0.3 12.5 11.2 12.0

    Dividend - - - - -

    Book value 39.4 14.7 25.4 35.1 45.5

    Tax retention ratio (PAT/PBT) 0.9 0.9 0.9 0.7 0.8

    Cost of debt (PBT/EBIT) 1.3 2.1 1.5 1.2 1.2

    EBIT margin (EBIT/Sales) 0.0 0.1 0.1 0.2 0.2

    Asset turnover ratio (Sales/Assets) 0.9 1.4 1.4 1.3 1.2

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

    Operating ROE 6.3 28.8 39.8 27.8 23.0

    RoCE (pre-tax) 4.1 7.4 19.0 23.4 19.4

    Angel RoIC 6.5 29.6 50.9 50.9 40.7

    RoE 6.3 28.6 40.1 27.5 22.9

    Asset turnover (fixed assets) 5.6 5.8 6.6 7.6 7.5

    Receivables days 61 80 80 83 83

    Payable days 81 64 55 54 54

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    Mahindra Satyam | 2QFY2013 Result Update

    October 30 2012 12

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

    This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investmentdecision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make

    such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies

    referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and

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    Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

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    The information in this document has been printed on the basis of publicly available information, internal data and other reliablesources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as thisdocument is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any wayresponsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report .Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify,nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. WhileAngel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory,compliance, or other reasons that prevent us from doing so.

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    Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, pleaserefer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited andits affiliates may have investment positions in the stocks recommended in this report.

    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