Mahindra Satyam - Express idea

India Infoline News Service | Mumbai |

Mahindra Satyam’s inherent expertise in manufacturing, BFSI, Enterprise solutions, BI/Analytics as well as decent mine-able clientele has helped MSAT to improve deal traction and recover operational performance over FY10-13.

CMP  Rs114, Target Rs132, Upside 15.8%

Deal pipeline improving; Client mining a key for continued traction

Mahindra Satyam’s (MSAT) inherent expertise in manufacturing, BFSI, Enterprise solutions, BI/Analytics as well as decent mine-able clientele has helped MSAT to improve deal traction and recover operational performance over FY10-13. Interaction with the management suggests increased deal participation even in larger contracts (US$50mn+).  Large deal conversion, which was amiss as yet, has started to show with US$50mn+ deal win in Q4 FY13. Improved traction is evident in MSAT's inclusion amongst the 'top 15' global service providers by ACV* as per industry analyst ISG (TPI). Increased sales bandwidth, expanded clientele and broadened services portfolio post merger as well as meaningful acquisitions provide a credible platform to exploit significant client mining headroom and improve the deal traction.


Manufacturing and BFSI to continue to drive growth

Manufacturing vertical continues to be a mainstay for MSAT driving a significant part of its growth. For instance, manufacturing accounts for ~60% (growing at 3.6% CQGR) of the incremental revenues over FY11-13.  An ongoing cost efficiency drive, hastened adoption of NMACS and short term transformational ERP engagements should sustain the traction. Another driver in terms of its verticals is BFSI, which has grown at 3%+ CQGR since Q1 FY12. MSAT’s focused BFSI approach (Tier 2 banks, pension funds, asset mgmt sub-verticals), mine-able clientele and continued demand especially in risk and compliance should bode well. Strong growth verticals like Healthcare, E&U and portfolio gaps in these areas can also lead to possible inorganic boost in our view.

Regulatory issues dwindle further; Valuations remain attractive

Long standing approval from the AP High Court has now cleared the path for merger of MSAT and TechM -a key positive. Weak rupee and operational levers of employee pyramid, SG&A leverage and utilization should lead to stable OPM over FY13-15E. Commendable margin performance in the past two years through strong execution further increases our confidence. As the deal traction for the combined entity improves along with reduced client (BT)/sector (Telecom) concentration, we believe valuations (currently 9.1x FY15E earnings) should re-rate. We nonetheless highlight that probable negative fallout of US immigration bill is a risk to our call.


Financial summary
Y/e 31 Mar (Rs m)
FY12
FY13
FY14E
FY15E
Revenues
63,956
76,935
84,246
93,787
yoy growth (%)
24.3
20.3
9.5
11.3
Operating profit
10,213
16,325
17,344
19,300
OPM (%)
16.0
21.2
20.6
20.6
Reported PAT
13,034
11,643
13,538
15,099
yoy growth (%)
-
10.9
2.2
11.5
 
 
 
 
 
EPS (Rs)
11.1
9.9
11.5
12.8
P/E (x)
10.6
11.8
10.2
9.1
Price/Book (x)
4.6
3.3
2.5
2.0
EV/EBITDA (x)
10.7
6.7
4.9
3.7
RoE (%)
50.7
37.2
28.2
24.2
Source: Company, India Infoline Research *ACV – Annual Contract Value 

***Note: This is a BSE Chart

 

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