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Transcript of Mahindra Satyam 2QFY2013RU
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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
Performance highlights
2QFY2013 Result Update | IT
October 30, 2012
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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
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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
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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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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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`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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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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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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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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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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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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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