Satyam Computer Services - Taking a breather? - Standard Chartered

- Reported US$ revenue came marginally below estimates; but higher INR realization pushed EBITDA margin (+87bp) and PAT (+29% qoq) ahead of expectations.

- Volume moderation disappointed (-1% qoq vs. our +3% estimate); Satyam ascribed to seasonality in TMT clients.

- Deal renewals strong/pipeline remain healthy; we broadly maintain our FY11-FY14F US$ revenue growth forecasts (19% versus 20% earlier).

- Headcount 'downtrading' (freshers are 93% of 9M FY12 net add) to be a key FY13 margin lever, in our view.

- We raise FY12/13 EPS by +21%/+9% on 3Q flow-through/ currency reset; maintain Outperform with 14% upside.

3Q FY12 - currency uplift helps. Cons. revenue declined 1.6% qoq to US$325m; +1.1% qoq realization gain (from project staffing rationalization) was cancelled by lower volume (-1.3%) and cross-currency impact (-1.4%). However, in INR terms, revenues at Rs17.2bn (+9% qoq) was in-line due to higher realized INR/USD rate (Rs52.9 vs. Rs51 our estimate) possibly due to back-ended invoicing. Thus, EBITDA margin came higher, +87bp to 16.2% (15.5% est.). PAT, at Rs3bn (+29% qoq), was ahead of estimates, from higher FX gains.

We see 3Q volume decline an aberration. Satyam attributed lower 3Q12 volume to seasonal shutdown in key TMT clients that should reverse in 4Q. It also highlighted the strength in deal renewals; US$25m+ deal pipeline remains healthy. While we would like higher traction in new logo wins/ramp-ups, we see limited risk to our 17% FY13 US$ revenue growth forecast given Satyam's relatively defensive business portfolio - lower BFSI (21%) + higher maintenance revenues (70%) + sub-peers pricing (positive in vendor consolidation scenarios).

But margins are now close to optimal levels. Despite 3Q margin O/P, we believe productivity gains from staffing rationalization are at peak. Flow through of broadening pyramid (freshers form 93% of 9M12 net add + 2,300 campus hires to join in FY13) and 'opportunistic' lateral hiring should help FY13 margin management in our view.

Maintain Outperform. Our FY12/FY13 EPS estimates are up mainly on 3Q12 actual flow-through + currency resets. Thus, we maintain our PT at Rs87 (11x FY13E). Satyam remains an attractive risk-reward play, in our view, though with a limited time window, before the planned merger with Tech Mahindra by end 2012/mid-2013.

Source : Equity Bulls

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