Mahindra Satyam - Diwali Picks 2012 - IIFL

Improved growth profile on the back of better deal participation, win rates

Revenue growth profile for Mahindra Satyam has improved impressively over past many quarters. A reduced overhang in terms of legal issues, S&M investment and inherent strength in certain verticals/services (eg Manufacturing, ERP, analytics), we believe, has resulted in better traction. Improved deal participation, higher win ratio and strong client additions in the past year further validate the same. While larger deals wins (US$50mn+) are still to fructify, decent traction in key verticals/services should continue.

OPM performance impressive; decent margin levers prevail going ahead

Though the strong OPM expansion (~620bps over past one year) was supported by weaker rupee, a material portion was also on the back of strong operational management. Focused improvement in the employee pyramid as well as operational efficiency gains through SG&A leverage, sub-contractor cost optimization and utilization have been the key reasons for the same. Going forward we expect levers of employee pyramid and SG&A leverage to continue to support the margin. Also as legal issues dwindle, the legal expenses are expected to normalize over a period of time.

Improved performance reflecting in better operating metrics

On the back of improving revenue performance and strong operational management, Satyam's operating metrics too are picking up. Robust client mining/hunting has resulted in Top5/Top10 clients growing faster than the company (2.7%/3.1% versus 1.8% cqgr over last four quarters) as well as strong client additions (135 additions in trailing four quarters). On the back of improved DSO (92 currently versus 100+in FY11), the operating cash generation too is on the up-move. On the employee front, employee additions continued to be good with attrition trending down meaningfully to 13.1% (15.6% in Q2 FY12). Overall the legal issues are lower now with the final settlement of US investor lawsuit. For the incremental legal issues including the UK based institutional investor lawsuit (initial claim of US$150mn), the company has further provided for Rs2.56bn in Q4 FY12.

Positive synergies to play out post merger with Tech M; Valuation attractive

We expect the positive synergies between Satyam & Tech M to play out more effectively post the merger. Better deal participation, expanded clientele and broader services/vertical presence should help the combined entity to effectively compete with larger peers leading to lowering of the growth differential. Also better diversification of verticals and client/s are expected to bode well for the combined entity. Operationally too, synergies from combined sales engine, client management and delivery are added positives. Considering the increased scale (estimated FY13 revenues base of ~US$2.6bn), decent traction at both Tech M and Satyam and the merger synergies, we expect the valuation gap with larger peers to narrow.

Source : Equity Bulls

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