Indian Economy
India ‘s GDP is projected to turn at a rate of 9.4 % in 2010 ( IMF ) . It was earlier projected to turn at 8.8 % . However, with robust corporate net incomes and favourable funding conditions fuel investing the growing rate was raised. The jutting rate for 2011 is 8.5 % .
Growth in the services sector, which accounts for about 57 per cent of the GDP, is expected to chair marginally from 8.7 per cent in 2009-10 to 8.4 per cent in 2010-11 due to worsen in growing of authorities outgo relation to the last twelvemonth. Industrial growing is expected to keep its public presentation of 2009-10 as demand, both exports and domestic, continues to lift. In the event of a normal monsoon, agribusiness is expected to turn at a rate higher than its tendency.
Investing activity should pick up with gross fixed capital formation expected to turn at 12.5 per cent in 2010-11 Industrial activity is expected to stay floaty in the following financial twelvemonth. Capital goods are expected to profit from an upturn in investing demand, while the consumer goods industry is likely to have a encouragement.
Year-on-year rising prices should get down to decelerate down in malice of demand force per unit areas, given the exceptionally high base of this twelvemonth. Overall, WPI rising prices is expected to be around 6.5-7.0 per cent.
As growing additions farther grip and rising prices remains elevated, the RBI would get down raising involvement rates in FY11. Furthermore, the big authorities borrowing would exercise an upward force per unit area on outputs. It is expected to be around 8.3-8.5 % .
The current exchange rate is Rs 46.53 per dollar. Traveling frontward, the Rupee is expected to beef up farther due to economic uncertainness in US and other developed markets and robust public presentation of the Indian economic system during the crisis.
The roll-back in revenue enhancement grants and the sustained recovery in industry public presentation is expected to ensue in a important betterment in revenue enhancement aggregations during FY11. In add-on, the combined expected grosss from the disinvestment in public sector endeavors, and grosss from the auction of 3-G are expected to further blow up the gross grosss. Hence the financial shortage is expected to be about 5.6 % of GDP.
On the other manus, the unemployment rate in India is about 10.7 % , which is 57.3 % higher than 2009.
However, the mentality for India can change depending on the alterations in the mentality for the planetary economic system. On the domestic forepart, any unforeseen crisp rise in rising prices is likely to ensue in comparatively rapid tightening of the pecuniary policy, which in bend, would raise market involvement rates, thereby presenting a downside hazard to economic growing.
India IT Sector
The Indian IT sector is expected to see single-digit gross growing for the first clip in a decennary in FY2010. The sector grosss to turn by 4 % in FY2010E, as compared with gross revenues CAGR of 35 % over FY2000-FY2009E owing to a diminution in the planetary macro economic growing and the ensuing diminution in IT disbursement. From these depressions, the IT sector is expected to retrieve and post double-digit gross growth-revenue CAGR of 14 % over FY2010E-FY2012E. Besides, with the 30 % gross revenues CAGR witnessed by the Indian IT sector during this decennary, the sector besides enjoyed high operating borders owing to industry-specific features of low fabrication costs.
Factors Fostering Growth
Amongst verticals, the demand in BFSI, Retail and Telecom sectors is increasing. As service lines, BPO and IMS are the cardinal growing drivers and demo a fringy addition in demand.
Growth is expected mostly from bing clients though moves to aim new clients and new verticals are positive from a long-run position.
Besides seller consolidation was deployed during the downswing which helped clients in bulk nest eggs. This turned out to be positive for the Indian IT companies.
The focal point would switch to states such as India, China, the Middle East and Russia which have the possible to offer better growing chances for the planetary IT services industry and are forecasted to hold IT disbursement CAGR over 2007-2011 in these states to be significantly higher ( 9 % -17 % ) than that in the US and Europe.
Focus will be switching to untapped verticals such as authorities undertakings, substructure services, and health care.
The Indian IT sector has benefited from revenue enhancement vacations provided by the STPI and SEZ.
Challenges
The US and Europe together contribute to 86 % of the gross for most Indian IT companies. With the diminution in both the US and EU GDP in 2009, there can be a direct impact on the growing of the Indian IT sector in FY2010E
Indian Rupee ( INR ) , which was reasonably stable through the first half of this decennary, has been volatile since 2007. This has exposed Indian IT houses to both the translational and transactional impact of currency volatility.
An mean pay rising prices of 15 % YOY has contributed significantly in cut downing the offshore purchase advantage.
The mean abrasion rate in the Indian IT services industry is about 12 % -13 % per twelvemonth and much higher in the BPO industry at around 40 % -50 % , harmonizing to Nasscom.
The Indian IT industry has benefited from lower revenue enhancement rates as a consequence of the STPI revenue enhancement vacation which is set to stop in March 2011. This would hold a direct impact on the sector ‘s profitableness from FY2012E.
Continental Europe continues to demo increased openness to off-shoring but has issues on labour ordinances related to the replacing of abroad occupations by offshore employees
M & A ; A integrating chances have been less than earlier awaited
Company Research
Mahindra Satyam
HOLD 31 July 2010
Price Target
Rs 86.4 Rs 95
Sensex 16690
Stock Detailss
Sector
Media
Reuters
SATY.BO
Bloomberg
SCS.IN
Face Value ( Rs )
2
No of portions o/s ( manganese )
1176.34
Market Cap ( Rs bn )
101.753
Daily Average Vol ( No of portions )
.25 manganese
Shareholding Pattern ( % )
Promoters
42.67
Institutions
13.67
Non-institution
32.52
Others
11.14
Beginning: Company informations
New direction attempts probably to bear fruit, expect positive surprises in June revelation.
Satyam is profiting from a recovery in IT disbursement environment, new direction squad that is puting systems in topographic point and strong involvement from senior forces in Mahindra group. Business in Satyam has stabilized and is bit by bit get downing to travel up with new contract closings. Backed by strong cost direction and use betterment, Satyam is expected to see crisp uptick in profitableness taking to EPS of Rs 8/Rs 11 in FY11E/FY12E. The revelation of histories in Oct-10 terminal is expected to be a positive surprise for most analysts/investors and be the cardinal accelerator for following upward portion monetary value move.
Business is get downing to travel up in our position after a period of diminution and uncertainness.
While the company has lost a few big clients due to the accounting dirt, the uptick in seaward disbursement and limited options in the large-cap infinite ( TCS, Infosys, Wipro, Cognizant and HCL Tech ) is assisting Satyam to collar concern diminution and win new trades. The current gross has reached the US $ 1.3 billion grade and is further expected to lift with new approaching trades uptick from Jun-10 one-fourth. It is expected to hold a 5 % /29 % gross growing in FY11/FY12 with FY12 on a low base.
Margins/ROIC in line with equals over average term:
The new direction has taken several stairss to cut costs including cancellation of rentals, decrease in gross revenues and gradual employee realignment. While current borders would be in single-digits, Satyam ‘s borders in the average term would scale up near to peer group – EBITDA borders of ~20 % in the following 18-24 months. Further, plus disposals would take to return ratios in line with equal group by FY12 in our position. For legal liabilities, our theoretical account has a US $ 200 m write-down – US $ 70 m for Upaid and staying for category action suits in US. The authorities expects the US market regulator Securities Exchange Commission ( SEC ) non to enforce any punishment for frauds committed by the old direction.
Hazards Involved
The key hazard to this thesis comes from a hold in Satyam turn-around. While the new direction squad has taken a figure of right stairss in our position, the turning around a large company can take longer than anticipated particularly given the size of crisis that Satyam faced. However the limited set of quality participants in Indian IT sector and crisp IT spend resurgence is assisting Satyam mitigate this hazard. Second, Tech Mahindra ‘s patchy public presentation over the last few quarters has raised inquiries about ability of direction to turn-around Satyam. The senior direction in Mahindra have been more closely associated with Satyam and there is considerable focal point on turning around Satyam.
Right employee mix – Another large challenge, station near-completion of employee rationalization
Despite near-completion of employee rationalization, the right endowment mix to provide to the growing in demand would be the following large challenge for Satyam during FY11 vis-a-vis equals. This is based on factors such as high abrasion in Satyam, likely impairment in preparation substructure and increasing sidelong abrasion in the industry. The use rate is expected to be 49.5 % in FY10, which is likely to increase to 65.9 % in FY11E albeit still lower than industry equals runing at 70-80 % at present. In FY12, with expected pick-up in gross growing ( while figure of employees mostly staying level YoY ) and likely betterment in preparation substructure, the use rate is expected to increase to ~73.5 % for Satyam that, which would be normal for similar-size companies.
Amalgamation with Tech Mahindra
The amalgamation with Tech Mahindra is expected to be completed by 2015-16. This would beef up the company ‘s direction bandwidth by adding the direction from the Mahindra group. This would supply the two companies with more stableness and a higher portion in the market. This would besides sharpen the focal point in several countries and generate grip for the concern. The amalgamation would get down from Oct 15 when the fiscal inside informations would be disclosed.
FIFA World Cup ’10 Project, reconstructing the trade name
Satyam ‘s function during the FIFA World Cup 2010 was rather seeable and it is now looking frontward to tap that market farther. Not long ago, the trade name was about written off. But with trade name associations such as FIFA, the company hopes to raise its trade name image. No surprise so that the company is striking a trade with football ‘s international government organic structure FIFA, to be the IT services supplier for the 2014 Fifa World Cup as well..
New Products and Clients
The company has been rather proactive in establishing new merchandises. Recently it launched a new service bringing theoretical account called “ Delivery Xpress ” based on Oracle. It has late launched a new development Centre of BASF IT Services at its office in Chennai. In June this twelvemonth, Mahindra Satyam BPO had entered into a partnership with Direct Channel Holding Ltd. , one of Africa ‘s prima contact Centre and BPO companies. It besides commenced an SEZ in Hyderabad this twelvemonth. Furthermore, it is now diversifying into other markets such as Africa and Latin America.
Re-statement of histories to better Satyam ‘s trade grapevine
The trade grapevine is likely to better station re-statement of Satyam ‘s fiscal statements ( due in Oct’10 ) that would give more comfort to clients and increase the company ‘s eligibility in new-deal RFPs ; hence, higher growing for Satyam is expected in FY12 V FY11.
EBITDA border beyond 18-20 % , a challenge
The challenges associating to grosss, pull offing use rates and employee cost would go on over the average term for Satyam. Achieving borders beyond 18-20 % requires recovering lost market portion, tight control on SG & A ; A investings, high pricing power with clients, material alteration in employee pyramid & A ; bringing theoretical account, higher off-shoring etc, for which, we believe, Satyam has lower flexibleness over the following 1-3years. Hence, the full benefit of economic systems of graduated table is still distant for Satyam and the FY12 EBITDA border estimation of 18.2 % for Satyam is sensible, peculiarly station important reorganization by TechM direction.
Predictability for points below EBITDA lower
The re-statement of Satyam ‘s earlier fiscal statements may take to losingss, which can be carried frontward, and countervail against nonexempt income from FY11. A nil revenue enhancement rate has been assumed for FY10E, ~8 % for FY11E and ~25 % for FY12E. The PAT estimations for Satyam exclude other income ( including forex ) . The forex gain/loss is likely to add volatility to estimated PAT. Hence, Satyam can be valued utilizing EV/E instead than P/E, given lower net incomes predictability for points below EBITDA degree. A just value estimation for Satyam ( based on EV/E method ) factors-in net hard currency including exchequer returns on idle net hard currency.
Notably, the balance sheet for Satyam has non been estimated as, post re-statement of Satyam ‘s histories ( due in Oct’10 ) , the balance sheet would differ significantly from any estimations. Besides, while circulating information on Q3FY09 and elaborating on January ’09 & A ; February ’09 consequences, Satyam direction stated the undependability of information and any estimations therein with its caution that concluding and/or audited consequences may be materially higher or lower than projected. Further, while valuing the company on EV/E, certain premises have been made with regard to hard currency & A ; debt in Satyam ‘s books.
Valuation – Target monetary value offers unfavorable risk-reward
EV/E is a better multiple for valuing Satyam, given lower predictability on points below EBITDA and likely restatement of Satyam ‘s old old ages ‘ histories, traveling frontward. Reinitiated coverage on Satyam is with HOLD and aim monetary value of Rs95/share. Based on mark EV/E of 7.4xFY12E, repeating EBITDA which is at 40-45 % price reduction to Infosys and 10-15 % price reduction to HCL Tech, is just, given deficiency of sufficient information to value Satyam every bit good as the acclivitous undertaking to turn it about. The current rating of Satyam already factors-in 15-20 % EBITDA border in FY11E-12E versus probably single-digit EBITDA border in FY10. Hence, farther rating re-rating for Satyam is dependent on EBITDA border upside beyond 20 % , which is an acclivitous undertaking for the direction and improbable boulder clay FY12. The estimation of 18.2 % EBITDA border in FY12 is based on utilisation rate of 73.5 % ( standalone ) , which would be at industry criterion for companies with similar-size as Satyam.
Company Description
Mahindra Satyam ( NYSE: Say ) is a taking planetary concern and information engineering services company that leverages deep industry and functional expertness, taking engineering patterns, and an advanced, planetary bringing theoretical account to assist clients transform their highest-value concern procedures and better their concern public presentation.
The company ‘s professionals excel in endeavor solutions, supply concatenation direction, client relationship direction, concern intelligence, concern procedure quality, technology and merchandise lifecycle direction, and substructure services, among other cardinal capablenesss.
Mahindra Satyam is portion of the $ 7.1 billion Mahindra Group, a planetary industrial federation of companies and one of the top 10 industrial houses based in India. The Group ‘s involvements span fiscal services, automotive merchandises, trade, retail and logistics, information engineering and substructure development
Key hazards
Key hazards to these recommendations are the re-statement of Satyam ‘s histories and the ensuing higher-than-estimated gross run rate, net cash/bank balances and lower-than-estimated employees ( connoting positive surprise for Satyam ) . On the other manus, lower-than-estimated gross run rate, net hard currency and bank balances and higher-than-estimated employees can take to a material negative surprise.
Another fact is that re-stated net hard currency and bank balance will impact our mark monetary value estimation for Satyam.
The station re-statement of Satyam ‘s histories and more lucidity on its liabilities ( including off-balance sheet ) , the TechM direction will considermerging TechM and Satyam. Our estimations, at the current market monetary value of TechM and Satyam, value the Mahindra Group ‘s interest in TechM ( excepting TechM ‘s interest in Satyam ) at ~US $ 550mn and in Satyam at ~US $ 450mn. With deficiency of lucidity on Satyam ‘s re-stated fiscal statements and ensuing alteration in Satyam ‘s ratings, ambiguity exists on the amalgamation ratio and, therefore, deficiency of investor involvement, at least till the re-statement of Satyam ‘s histories. The trade name individuality will besides be considered while unifying any company with the other.
