Mahindra Satyam - On expected lines - SCB

* Revenue growth trajectory on track - 3.9% qoq cc organic US$ revenue growth compares well with -0.4% to +4.6% reported by larger peers.

* 1Q13 EBITDA margin (21.7%) came ahead of estimates (19.3%) on full flow-through of INR depreciation; we maintain our FY13/14 forecasts at 19.3%/19.0%.

* Organic headcount add of 4% to base; Satyam's relatively defensive portfolio is helping manage weak macros; we see no risk to our 9% FY13 US$ revenue growth forecasts.

* Settlement of the Aberdeen US case lowers potential legal liabilities; we find the stock‟s valuation at 8x FY13E EPS attractive. Maintain Outperform, price target of Rs96.00.

1Q13 revenue momentum on track. Cons. revenue up 2.3% qoq to US$340m, in-line, ex-US$2m of vCustomer acquisition. EBITDA margin expanded 418bp to 21.7% (vs. our 19.3% est.) mainly from INR depreciation flow-through (+300bp); utilisation/headcount mix provided additional 85bp. Non-manpower costs revenue share fell 2% qoq due to lower share of low-margin SI business. PBT, before exceptional items, was Rs4.9bn, +53% qoq; reported PAT was Rs3.5bn, above our Rs3.0bn estimate, helped by higher FX gains (Rs665m) and better yields.

FY13 outlook. Satyam's commentary was balanced on FY13 outlook. Impact of weak macro demand trends - slow decision making/selective pricing pressures - is softened by Satyam's defensive business portfolio. The concentrated 1Q13 revenue growth profile was a dampener - organic revenue growth was entirely led by the top client. However, continued headcount build-out is a positive - 3.7% organic addition tracks 3.3% in 4Q12. We see minimal risk to our 9% FY13 US$ organic revenue growth forecasts.

20%+ EBITDA margin - how sustainable? 1Q13 surprise notwithstanding, we expect EBITDA margin to trend down over 2Q-4Q13. Pyramid rationalization is now peaking - 34% share for 0-3 years experience base in 1Q compares well with Infosys /TCS (36%/38%) thus restricting upside on utilization/ unit-cost interplay. Given the competitive pricing scenario, we expect FY13 EBITDA margin in 19-20% band on stable INR/USD.

Maintain OP; our key value pick. We retain our conservative near-term stance; however, current valuations (8x FY13F EPS) are attractive in our view to play the post-merger scale gains theme along with TechMahindra.

Source : Equity Bulls

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