Motilal Oswal Neutral on Mahindra Satyam

MAHINDRA SATYAM 3QFY11: Operating performance below est; Margin recovery to be gradual; Neutral on Tech Mahindra

Stability achieved in 1HFY11 revenue performance was followed by a 3% sequential growth in 3QFY11, driven by 2.5% QoQ increase in volumes.

EBITDA margin improved only 50bp QoQ (lower than our estimate of 160bp uptick) as SGA costs increased 210bp QoQ to 22.6%.

EBITDA margin is at 6.4%, but expected to pick up going forward: (a) Increased fresher hiring; (b) Decline in SGA; (c) Volume-driven revenue growth.

Attrition remained at 25% in 3Q. Net addition in headcount was 764, mostly laterals, the company guided at a targeted intake of 3,500 freshers next fiscal.

The company has started participating in RFPs for large deals in the range of US$30-100m after being current with financial reporting starting Nov 2010.

Post 3QFY11, our estimates for Mahindra Satyam, and consequently for Tech Mahindra, remain largely unchanged. We expect Tech Mahindra to post revenue CAGR of 9% over FY11-13. Including profits from Mahindra Satyam, we expect an EPS CAGR of 6.3% during the same period. The stock trades at 11.3x FY12E and 9.9x FY13E earnings. Maintain Neutral, with a price target of Rs714, based on 11x FY13E.

Source : Equity Bulls

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