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Mahindra Satyam 2QFY2013 performance highlights and results update

Contributed by Angel Broking

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 MahindraRs.s management post its acquisition in June 2009. We maintain Accumulate rating on the stock.

Quarterly highlights: 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 Rs.1,938r, up 3.1% qoq. The companyRs.s 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 Rs.278cr, impacted by forex loss of Rs.86cr as against a gain of Rs.66cr in 1QFY2013.

Outlook and valuation: The management mentioned that there is a definite improvement in the number of deals that the company is getting invited for and thereRs.s 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 companyRs.s 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 11 x FY2014E EPS, which gives a target price of Rs.115. We maintain our Accumulate rating on the stock.