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Spark Capital - Mahindra Satyam: Soft results; Upgrade to Buy on attractive valuations




Spark Capital Advisors(India) Private Limited


17 May 2013





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Soft results; Upgrade to Buy on attractive valuations Mahindra Satyam (MSAT) reported US$ revenue growth of 1%, EBITDA margin declined by 150bps qoq. FY13 has been a year of steady execution and we expect FY14 to be better in revenue growth on the back of strong growth trajectory in Manufacturing vertical. We believe the recent correction in stock provides an attractive valuation and upgrade stock to BUY with a price target of Rs. 132, arrived based on our price target of Rs. 1,120 for Tech Mahindra. Low revenue growth: The company continued its second quarter of soft growth on the back of ramp-downs in Retail and BFSI vertical offset by strong momentum in manufacturing. Manufacturing grew 10% qoq while BFSI and Retail declined by 4.7% and 7.2% qoq respectively. For the year Manufacturing was the key growth driver and management expects the same to continue into FY14 Margin surprise exists and we expect it to continue: EBITDA Margins declined 150bps qoq owing to normalisation of provision reversal done in 3QFY13. Margins for FY13 expanded by 520 bps with forex contributing 370bps of the margin expansion and operation improvements the remaining. Management commentary indicated, increased confidence in maintaining Margins at similar levels on a constant currency basis. Exceptional boost Earnings: MSAT recognised a write back of earlier provisions for loss in its subsidiary to the tune of Rs. 1.34 bn. We note that this is purely a book entry and does not involve any cash on taxation impact. Over the last two years MSAT had a number of exceptional items with some like class action suit having cash impact. We note that going forward predictability of earnings would be higher as most provisions / class action suit / reversals are done with. Upgrade to Buy: Over the last two months MSAT has corrected by 15% and we believe the recent correction provides an attractive risk-reward. Management expects the Honourable Andhra Pradesh High Court’s decision on merger with Tech Mahindra to be clear by June second week and we expect the same to be a catalyst. Negative decision on merger with Tech Mahindra is the key risk to near-term performance in our view. We value the merged company at 11x FY15E EPS to arrive at our price target of Rs. 1,120 for Tech Mahindra and Rs. 132 for MSAT. Upgrade to BUY

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