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September 30, 2010
Satyam saga unveils…
Mahindra Satyam reported its FY2009 and FY2010 numbers, which underperformed the market’s expectations. The company reported revenue of US $1.1bn for FY2010, which was in line with our estimates. The company’s revenue slumped by 38%, whereas the headcount dropped by 40% yoy. The company also lost 194 clients, with majority of them in the BFSI space; however, it managed to add 44 clients in FY2010. Post the break out of the Satyam scam in January 2009, the company experienced heavy churn in clients asking for outright termination. However, in 1HFY2010, the company continued to service some of these clients due to contractual obligations. Thus, we believe the revenue run rate for 1HFY2010 would be on a higher side as opposed to 2HFY2010. Hence, we take the implied recurring revenue to be lower at ~Rs4,600cr, which is with an assumption of billing rates ~20% lower than Infosys and with an employee base of ~27,000. With the management focusing on reincarnating the operational matrix over the next 18 months, we expect the company to register a revenue CAGR of 15% over FY2010–FY12E. A turnaround story: Tech Mahindra took the reins of Satyam in its hands in April 2009 and, indeed, turned around the company by scaling up its EBITDA margins by 491bp yoy despite exorbitant client attrition, which led to a 38% yoy revenue decline. We believe the exodus of clients that began in 1HFY2010 must have left the profitability spiral downwards and any pick up would have taken place only in 2HFY2010. Thus, the average EBITDA margins for 2HFY2010 would have been higher than the reported 8.3% in FY2010. The company still has huge headroom to refurbish its operating parameters. We believe the company will be able to scale up its EBITDA margins to 16% and PAT margin to 12% by FY2012. Switch to Tech Mahindra: Mahindra Satyam has rallied by over 23% in the past month in anticipation of revenue run rate of over US $1.2bn and EBITDA margin of 15–18% for FY2010. The stock is currently trading at 16.0x FY2012E EPS of Rs6.2, which is on a higher side. On a risk-reward basis, Tech Mahindra, the parent company, looks attractive when valued on an SOTP basis i.e., at 12x FY2012E EPS of Rs53.2, and adding value of stake in Mahindra Satyam with holding discount of 25% to its current market cap (discounting the over optimism). Hence, we recommend a switch from Mahindra Satyam to Tech Mahindra for an upside of 19%.
CMP Target Price
Valuation for Tech Mahindra (SOTP basis)
(Rs cr) Fully diluted EPS for Tech Mahindra (standalone) (Rs) Target P/E(x) for Tech Mahindra Target Mcap for Tech Mahindra (ex-Satyam) Market value of stake in Mahindra Satyam Holding discount to Mahindra Satyam's stake (%) Target Mcap of stake in Mahindra Satyam Target Mcap for Tech Mahindra (incl. Satyam) Target price (incl value of stake in Satyam) (Rs)
Source: Company, Angel Research
FY2012E 53.2 12 7,865 4,966 25 3,725 11,590 942
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50 4.30) 62.90 5259.40 242.90 21.60) (1.30 214.80) (121.70 20.20 267.60) 2. 2010 2 .60) (0. Note:* indicates published accounts Exhibit 2: Details of exceptional expenditure Rs cr Expenses related to restructuring /right sizing Expenses related to forensic investigation and litigation support Provision for doubtful debts .Mahindra Satyam | Event Update Exhibit 1: Reinstated Profit & Loss statement Rs cr Income from operations Expenditure Employee cost Cost of software & hardware sold operating & administration expense EBITDA as % to sales Depreciation EBIT as % to sales Interest & Financing charge Other Income PBT Exceptional item PBT(after exceptional item) Tax PAT Minority interest Adj PAT EPS 1687.60) 7992.992.50 2.20 416.10 (23.70 3981.70) 22.90 8.60 315.30 1376.8 7.60) 159. Angel Research FY2009 FY2010 93.70 3.10 63.20 (8176.242.80 1834.30 230. impairment of assets Erosion in value of assets in subsidiaries Provision for contingencies Prior period items 83.10 FY2008* 8473.20 1918.9 September 30.30 19.00 456.90 (101.90) 0.40 326.70 163.1 771.8 216.20 (123.20 1918.90 25.40 32.00 (8174.20 301.50 FY2009 8812.4 106.00 (8015.0 Source: Company.50) 1043.70 (124.7 416.60 1671. Angel Research.30 (24.9 475 6.30 2437.2 419.90 105.00 Source: Company.advances.10) 6073.40 1687.60 FY2010 5481.
7 FY2008* 134.583.2 3.9 Amount pending investigation suspense account (net) Total capital employed Fixed assets Investments Deferred tax assets Current assets. Angel Research.540.455.3 881.4 1.389.5 7.926.5 87.2 1.2 4.9 3.2 0.5 3.6 986.9 291.455.4 2.609.813.696.6 897.1 2.4 272.1 5.5 626.8 FY2009 134.5 Source: Company.926.7 19.9 1 1.502.4 5.4 216.4 3.813.1 4.455.103.9 1.2 6.1 42.551.3 4.230. 2010 3 . loans and advances Inventories Sundry debtors Cash and cash balances Other current assets Loans and advances Less: Current liabilities and provision Liabilities Provision Miscellaneous expenditure Profit and loss account Sub total Unexplained differences suspense account (net) Total capital deployed 7.478.749. Note:* indicates published accounts September 30.8 495.279.2 1.6 0 7.7 20.813.6 384.370.1 1.2 1.4 5.7 550.3 466.4 0.9 2.8 FY2010 235.8 6.8 2.6 500.238.230.3 923 2.9 4.Mahindra Satyam | Event Update Exhibit 3: Reinstated balance sheet Rs cr Share capital Share application money pending allotment Reserve and surplus Minority interest Loan funds Deferred tax liability 7.624.455.926.0 1.5 391.8 7.176.5 814.8 1.3 1.394.
Accordingly. Analyst ownership of the stock 2. or other reasons that prevent us from doing so. 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). Angel and its Group companies ownership of the stock 3. please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. nor its directors. as such.angeltrade. outstanding positions and trading volume. Broking relationship with company covered Mahindra Satyam No Yes No No Tech Mahindra No Yes No No Note: We have not considered any Exposure below Rs 1 lakh for Angel. information or data may not be reproduced. there may be regulatory. as on the date of this report or in the past. Neither Angel Broking Limited.com DISCLAIMER This document is solely for the personal information of the recipient. and the company may or may not subscribe to all the views expressed within. Angel Broking Limited. as opposed to focusing on a company's fundamentals and. Disclosure of Interest Statement 1. redistributed or passed on. investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report. Nothing in this document should be construed as investment or financial advice. its affiliates. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. compliance. its proprietary trading and investment businesses may.com Website: www. express or implied. contents or data contained within this document. and should consult their own advisors to determine the merits and risks of such an investment. internal data and other reliable sources believed to be true. directors. Reports based on technical and derivative analysis center on studying charts of a stock's price movement. The information in this document has been printed on the basis of publicly available information. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material. The views contained in this document are those of the analyst. but we do not represent that it is accurate or complete and it should not be relied on as such. from time to time. as this document is for general guidance only. to the accuracy. directly or indirectly. employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Also. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. and its contents. 2010 4 . nor make any representation or warranty. This document is being supplied to you solely for your information. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance.4040 3800 E-mail: research@angeltrade. its Group companies and Directors. Ratings (Returns): Buy (> 15%) Reduce (-5% to 15%) Accumulate (5% to 15%) Sell (< -15%) Neutral (-5 to 5%) September 30. we cannot testify. Angel and its Group companies' Directors ownership of the stock 4. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Angel Broking Limited has not independently verified all the information contained within this document. and must not be singularly used as the basis of any investment decision. make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. may not match with a report on a company's fundamentals.Mahindra Satyam | Event Update Research Team Tel: 022 .
com srishti.com meenakshis.jajoo@angeltrade. Banking Automobile Infrastructure.com sharanb.com email@example.com@firstname.lastname@example.org dilipm. Technical Analyst Technical Analyst Head . Shipping) Research Associate (FMCG.email@example.com sandeepp. Logistics. Telecom Mid-cap Mid-cap Research Associate (Oil & Gas) Research Associate (Cement.srinivasan@angeltrade. Tel: (022) 3952 4568 / 4040 3800 Research Team Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Vaishali Jajoo Shailesh Kanani Anand Shah Deepak Pareek Sushant Dalmia Rupesh Sankhe Param Desai Sageraj Bariya Viraj Nadkarni Paresh Jain Amit Rane John Perinchery Srishti Anand Jai Sharda Sharan Lillaney Amit Vora V Srinivasan Mihir Salot Chitrangda Kapur Pooja Jain Yaresh Kothari Shrinivas Bhutda Sreekanth P.com chitrangdar.com deepak.jain@angeltrade. Media) Research Associate (Metals & Mining) Research Associate (Automobile) Research Associate (Banking) Research Associate (FMCG. 3rd Floor.thaker@angeltrade. Media Oil & Gas Pharmaceutical Cement.firstname.lastname@example.org@angeltrade. Sangam Cinema.email@example.com amitn. M. Manager Sr.com jai. Manager Sr.com hemang. Andheri (E). Road.com shailesh.V.firstname.lastname@example.org@email@example.com@angeltrade.com jayr. Mumbai .firstname.lastname@example.org@angeltrade.com VP-Research. Real Estate FMCG.com paramv.com Sr.email@example.com@angeltrade.com ganeshb.com rupeshd.400 059. Power Real Estate.V.com pranavs.Institutional Sales AVP .CDSL .firstname.lastname@example.org email@example.com@angeltrade. ‘A’ Wing.vora@angeltrade. Dealer Dealer Dealer mayuresh.Iyer@firstname.lastname@example.org@angeltrade.2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946 Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302 September 30.com email@example.com@angeltrade.Mahindra Satyam | Event Update Address: Acme Plaza. Opp.Institutional Sales Sr.com VP .com sreekanth. Hotels.Derivatives Derivative Analyst shardul. Mid-cap Retail.com v.com siddarth.com sushant. Pharmaceutical VP-Research.firstname.lastname@example.org@angeltrade.com pareshn.com bharat. Mid-cap Metals & Mining Banking Capital Goods IT.email@example.com@firstname.lastname@example.org@angeltrade.com email@example.com vasudeo.com pooja.kapur@angeltrade. Power) Research Associate (Logistics.j@angeltrade. Shipping Fertiliser.com john.com simran. 2010 5 .com anand.DP .firstname.lastname@example.org@email@example.com amit.agarwal@angeltrade.S Hemang Thaker Nitin Arora Technicals: Shardul Kulkarni Mileen Vasudeo Derivatives: Siddarth Bhamre Jaya Agarwal Institutional Sales Team: Mayuresh Joshi Abhimanyu Sofat Nitesh Jalan Pranav Modi Sandeep Jangir Ganesh Iyer Jay Harsora Meenakshi Chavan Gaurang Tisani Production Team: Bharathi Shetty Simran Kaur Bharat Patil Dilip Patel Research Editor Research Editor Production Production bharathi.com mihirr.agrawal@angeltrade. Real Estate) firstname.lastname@example.org .com niteshk.com Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN .com yareshb. Manager Sr.com email@example.com virajm.com vaibhav. Media) Research Associate (Capital Goods) Research Associate (Infra.com sageraj. Manager Sr.com shrinivas.
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