Mahindra Satyam - Fundamental Call - Consortium

Mahindra Satyam's USD revenues grew 0.6% qoq driven by healthy 10%/ 5% qoq growth in Europe/ RoW even as North America revenues declined ~5% qoq. Manufacturing and Technology, Media & Entertainment (TME) verticals are down 2-4% qoq driven by weak seasonality (furloughs, fewer working days).

Standalone revenues grew 0.6% qoq, driven by volume growth of 0.5% qoq.

EBIT margins increased by ~40bp qoq to ~19.7% primarily due to ~180bp benefit from reversal of bonus provision in personnel expenses.

Recurring net profit increased ~35% qoq to ~Rs3.7bn, largely due to a positive swing in forex-related gain/ loss (Rs336m gain, vs. Rs859m loss in Q2FY13).

Healthy margins; US$5m+/ US$10m+ clients up three each were are key positives Weakness in North America/ Technology, Media & Entertainment were main negatives Have raised our earnings estimates for FY13 by ~2% as incorporate healthy margins and positive non-operating items. Have kept FY14/ 15E EPS unchanged and build ~10% USD revenue CAGR, front-ended 760bp margin improvement and ~11% Rupee EPS CAGR over FY12-15E. Have assumed INR/ USD rates of Rs54/ Rs50/ Rs52 for FY13/ 14/ 15.

Valuations & view

Mahindra Satyam reported decent volume growth (consolidated 1.5% qoq) despite seasonal weakness for key verticals - Manufacturing and TME. We believe healthy revenue growth and sustained EBIT margins will continue to drive a gradual PER re-rating of the stock. MSAT is currently trading at undemanding valuations of ~10x FY14E EPS. Have a Outperformer rating , with a 12-month price target of Rs150 (based on 12x FY14E EPS).

Source : Equity Bulls

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