4QFY2013 Result Update | IT

May 16, 2013

Mahindra Satyam
Performance highlights
Y/E March (` cr) Net revenue EBITDA EBITDA margin (%) Adj. PAT* 4QFY13 1,936 389 20.1 320 3QFY13 1,940 418 21.6 374 % chg (qoq) (0.2) (7.0) (146)bp (14.4) 4QFY12 1,666 292 17.5 425 % chg (yoy) 16.2 33.5 260bp (24.6)

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 12,853 (2,900) 0.6 131/66 686,306 2 20,247 6,170 SATY.BO SCS@IN

`109 `126
12 Months

Source: Company, Angel Research; Note: * excluding exceptional items

Mahindra Satyam (Satyam) reported in-line net profit for 4QFY2013 while disappointed on the operational front. Volume growth was decent at 2.0% qoq. The company added 60 new clients during the quarter. Satyam has declared dividend of 30% (`0.6 per share) for the first time post 2009 crisis as the turnaround for Satyam is symbolically complete and the company now seems to be in good shape. We maintain our Buy rating on the stock. Quarterly highlights: For 4QFY2013, Satyam reported revenue of US$359mn, up 0.8% qoq. In INR terms, the revenue came in at `1,936cr, down 0.2% qoq. The companys EBITDA margin declined by 146bp qoq to 20.1%, owing to normalization of provision reversal done in 3QFY2013. Adjusted PAT came in at `320cr, down 14% qoq, impacted by lower other income of `72cr as against `111cr in 3QFY2013. Outlook and valuation: The new Management has proved its ability of turning around the company in three years time by putting it back to comparable industry level growth and improving margins from 8.3% in FY2010 to 16.0% in FY2012 and 21.2% in FY2013. Management cited that the company is getting invited for more number of large deals but the win ratio of company still stands much lower than the industry standards. To focus on this, the company has set up a team to increase the momentum of deal wins. We e xpect the companys core competence in EBS to supplement growth and post a 9.2% and 8.5% CAGR in USD and INR revenue, respectively, over FY2013-15E. The Management indicated that the proposed Tech Mahindra - Satyam merger had been approved by the Bombay High Court, while it awaits the Andhra Pradesh High Court approval. Management indicated that hearings at Andhra Pradesh High Court are complete and the judgment has been reserved and expects that the judgment will become available in the first two weeks of June. We value the stock at 11x FY2015E EPS, which gives a target price of `126. We maintain our Buy rating on the stock. Key financials (Consolidated, Indian GAAP)
Y/E March (` cr) Net sales % chg Net profit* % chg EBITDA margin (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2011 5,145 (6.1) 494 68.9 8.8 4.2 26.0 7.4 28.6 7.4 2.0 22.2 FY2012 6,396 24.3 1,197 142.4 16.0 11.1 9.8 4.3 40.1 19.0 1.6 9.8 FY2013E 7,693 20.3 1,324 10.7 21.2 9.9 11.0 3.1 32.1 25.8 1.3 6.1 FY2014E 8,278 7.6 1,237 (6.6) 20.3 10.5 10.4 2.4 23.1 21.5 1.1 5.6 FY2015E 9,062 9.5 1,342 8.4 20.1 11.4 9.6 1.9 20.0 19.5 0.9 4.6

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 42.6 9.1 30.4 17.9

Abs. (%) Sensex Mahindra Satyam

3m 11.5 49.9

1yr 26.3 57.6

3yr 19.1 24.0

Ankita Somani
+91 22 39387800 Ext: 6819 [email protected]

Source: Company, Angel Research; Note: *Excluding exceptional items

Please refer to important disclosures at the end of this report

Mahindra Satyam | 4QFY2013 Result Update

Exhibit 1: 4QFY2013 performance (Consolidated, Indian GAAP)

Y/E March (` cr) Net revenue Direct costs Gross profit SG&A expenses EBITDA Dep. and amortization EBIT Interest charges Other income PBT Tax PAT Exceptional item Minority interest Final PAT Adj. PAT* EPS* (`) Gross margin (%) EBITDA margin (%) EBIT margin (%) PAT margin (%) 4QFY13 1,936 1,161 775 385 389 61 328 4 72 396 75 321 (134) 1 454 320 3.9 40.0 20.1 16.9 15.9 3QFY13 1,940 1,104 836 417 418 36 382 3 111 490 112 378 294 4 80 374 0.7 43.1 21.6 19.7 18.2 (68.4) 467.8 (14.4) 467.8 (306)bp (146)bp (277)bp (230)bp (19.2) (33.3) (14.9) % chg (qoq) (0.2) 5.2 (7.3) (7.6) (7.0) 69.7 (14.2) 23.6 4QFY12 1,666 1,020 645 354 292 42 250 3 73 320 (94) 414 (109) (10) 534 425 4.5 38.7 17.5 15.0 24.4 (111.5) (15.0) (24.6) (15.0) 127bp 260bp 193bp (850)bp 23.7 (179.4) (22.5) % chg (yoy) 16.2 13.8 20.0 8.9 33.5 47.6 31.1 59.3 FY2013 7,693 4,516 3,178 1,545 1,632 190 1,443 13 318 1,747 412 1,335 160 10 1,164 1,324 9.9 41.3 21.2 18.8 16.5 FY2012 6,396 3,959 2,437 1,413 1,024 158 866 12 419 1,273 85 1,188 (109) (8) 1,306 1,197 11.1 38.1 16.0 13.5 17.6 (224.1) (10.9) 10.7 (10.9) 321bp 521bp 522bp (103)bp 37.2 384.2 12.3 % chg (yoy) 20.3 14.1 30.4 9.4 59.4 20.2 66.5 13.1

Source: Company, Angel Research; Note: *Excluding exceptional items

Exhibit 2: Actual vs Angel estimates

(` cr) Net revenue EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 1,936 20.1 320

Estimate 1,964 21.7 312

% Var. (1.4) (156)bp 2.7

Soft results
For 4QFY2013, Satyam reported revenue of US$359mn, up 0.8% qoq, majorly led by a 2.0% qoq volume growth. Cross currency movement impacted the dollar revenue growth negatively. In INR terms, the revenue came in at `1,936cr, down 0.2% qoq. In INR terms, IT services revenue grew by 1.2% qoq to `1,890cr. BPO reported a 28% qoq decline in revenues after a 17.9% qoq jump seen in revenues in 3QFY2013.

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Mahindra Satyam | 4QFY2013 Result Update

Exhibit 3: Trend in revenue growth (qoq)

370
360 350 3.5

2.9 2.2
342 354 356

359

(US$ mn)

340

330
320 310

332
0.8

0.6 0 4QFY12 1QFY13 2QFY13 3QFY13

qoq growth (%)

300 4QFY13
Revenue (US$mn)
Source: Company, Angel Research

Industry-wise, the companys anchor industry segment, manufacturing, led the companys growth during the quarter by posting 10.2% qoq growth in revenues. Management indicated that the deal pipeline in manufacturing industry vertical continues to be strong particularly in the US. In Europe, countries such as Germany, France and Sweden are showing good signs of growth in terms of revenues from manufacturing vertical and expect APAC to continue to be a strong contributor in manufacturing. Revenues from BFSI and retail & logistics (which were major growth drivers in 3QFY2013) declined by 3.0% and 5.7% qoq, respectively. The decline in revenues from retail is because in the last quarter retail had a one time in the BPO space and that one-off revenue got over during this quarter. The technology, media and entertainment (TME) industry segment reported a 1.4% qoq growth in revenues. The company is witnessing IT spending from retail and manufacturing clients who are focusing on cutting costs and driving efficiencies. In BFSI, IT spend is coming from areas such as risk, compliance management and regulatory issues. The Management indicated that they are hopeful of pickup in revenue growth in FY2014 aided by new logo wins and deal wins across all the industry segments.

Exhibit 4: Growth in industry segments

Particulars Manufacturing TME (includes telecom also) BFSI Retail and logistics Healthcare and lifesciences Others
Source: Company, Angel Research

% to revenue 36.0 22.1 19.2 11.2 5.2 6.2

% growth (qoq) 10.2 1.4 (3.0) (5.7) (12.5) (10.6)

% growth (yoy) 22.5 14.6 10.0 10.8 (5.7) (38.6)

Geography-wise, growth was led by America, the revenue from which grew by 4.9% qoq. Revenue from Europe was soft with 7.4% qoq decline. The Management indicated that the deal pipeline remains healthy from emerging geographies, where MNCs are trying to expand their footprints.

May 16, 2013

(%)

Mahindra Satyam | 4QFY2013 Result Update

Exhibit 5: Growth trend in geographies

Particulars Americas Europe RoW
Source: Company, Angel Research

% to revenue 54.0 22.0 24.0

% growth (qoq) 4.9 (7.4) 1.0

% growth (yoy) 15.3 (0.2) 4.5

Hiring and client metrics

During the quarter, the company witnessed reduction of 889 employees, taking its total employee base to 36,067 as the company working towards resource optimization. The attrition rate of the company increased to 14.3% from 13.1% in 3QFY2013. The company has give 2,000 offers to campus graduates for CY2014 and going ahead lateral hiring will be done keeping in mind the demand scenario and signs from the macroeconomic environment.

Exhibit 6: Employee metrics

Particulars Net employee addition Total employees Attrition (%)
Source: Company, Angel Research

4QFY12 1,073 33,353 15.0

1QFY13 2,643 35,996 14.1

2QFY13 791 36,787 13.1

3QFY13 169 36,956 13.1

4QFY13 (889) 36,067 14.3

The companys client metrics saw some qualitative movement with clients getting added in higher revenue brackets. The company witnessed addition of two clients in US$20mn-50mn revenue bracket. The total active client base of the company stood at 385 as against 368 in 3QFY2013. The companys growth was driven by top 5 clients which reported revenue growth of 4.7% qoq while growth from non top 10 clients remained tardy with non top-10 clients posting just 0.8% qoq revenue growth. The company added 60 new clients during the quarter.

Exhibit 7: Client metrics

Particulars Total active clients US$1mn5mn US$5mn10mn US$10mn20mn US$20mn50mn US$50mn+
Source: Company, Angel Research

4QFY12 314 83 13 17 13 3

1QFY13 372 94 21 14 12 4

2QFY13 363 101 23 15 10 5

3QFY13 368 98 23 17 11 5

4QFY13 385 95 26 13 13 5

Operating margins decline

During the quarter, the companys EBITDA margin declined by 146bp qoq to 20.1%, owing to normalization of provision reversal done in 3QFY2013 (one-off provision reversal of `35.5cr done in 3QFY2013 on account of certain approvals accrued towards employee bonus). EBITDA margin for FY2013 expanded by 520bp with forex contributing ~370bp of the margin expansion and operation improvements the remaining. Management commentary indicated increased

May 16, 2013

Mahindra Satyam | 4QFY2013 Result Update

confidence in maintaining margins at similar levels on a constant currency basis. Going ahead, the Management indicated that it will keep focusing on three margin levers: 1) employee pyramid rationalization, 2) utilization improvement and 3) G&A efficiencies. However, each of these levers has limited slack going forward.

Exhibit 8: Margin profile

45

40 35

38.7

41.1

41.0

43.1

40.0

(%)

30 25 20
15 10 4QFY12 1QFY13 2QFY13 EBITDA margin 3QFY13 4QFY13 Gross margin EBIT margin

21.7 17.5 15.0 19.1

21.5
19.3

21.6
19.7

20.1

16.9

Source: Company, Angel Research

PAT came in at `454cr, aided by one-time exceptional gain of `134cr. Adjusted net profit declined by 14% qoq impacted by lower other income of `72cr as against `111cr in 3QFY2013. Over the last two years Satyam 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.

Outlook and valuation

The new Management has proved its ability of turning around the company in three years time by putting it back to comparable industry level growth and improving margins from 8.3% in FY2010 to 16.0% in FY2012 and 21.2% in FY2013. Satyam has declared dividend of 30% (`0.6 per share) for the first time post 2009 crisis as the turnaround for Satyam is symbolically complete and the company now seems to be in good shape. Management cited that the company is getting invited for more number of large deals but the win ratio of company still stands much lower than the industry standards. To focus on this, the company has set up a team to increase the momentum of deal wins. Management indicated that it sees better revenue growth in FY2014 aided both by decent logo wins and healthy deal pipeline across verticals such as manufacturing, retail and healthcare. Satyam has successfully addressed its key concern areas in the past three years of client mining, employee retention, margin expansion, and dispute resolution. Satyam has enterprise business solutions (EBS; ~40% of its revenue) and manufacturing (~34% of its revenue) showing modest traction. The company expects this service and vertical respectively to bolster growth and help it to track the industrys growth rate. We expect the companys core competence in EBS to

May 16, 2013

Mahindra Satyam | 4QFY2013 Result Update

supplement growth and post a 9.2% and 8.5% CAGR in USD and INR revenue, respectively, over FY2013-15E. The Management indicated that the proposed Tech Mahindra - Satyam merger had been approved by the Bombay High Court, while it awaits the Andhra Pradesh High Court approval. Management indicated that hearings at Andhra Pradesh High Court are complete and the judgment has been reserved and expects that the judgment will become available in the first two weeks of June. On the operating front, Management still believes that further improvement in employee utilization, experience pyramid and SG&A leverage will help mitigate some of the margin headwinds in constant currency. However, each of these levers has limited slack going forward and would not derive any meaningful uptick in operating margins from current levels. We expect EBITDA margin to be at 20.3% and 20.1% in FY2014 and FY2015 from 21.2% in FY2013. At the current market price of `109, the stock is trading at 9.6x FY2015E EPS of `11.4. We value the stock at 11x FY2015E EPS, which gives a target price of `126. We maintain our Buy rating on the stock.

Exhibit 9: Key assumptions

Particulars Revenue growth - USD terms (%) Revenue growth - INR terms (%) EBITDA margin (%) EBIT margin (%) Tax rate (%) EPS growth (%)
Source: Company, Angel Research

FY2014 9.0 7.6 20.3 17.8 27.0 6.3

FY2015 9.4 9.5 20.1 17.6 28.0 8.4

Exhibit 10: One-year forward PE(x) chart

200

180
160 140

120
100 80
(` )

60
40 20

0 Apr-09

Oct-09
Price

Apr-10

Oct-10
16x

Apr-11
13x

Oct-11
10x

Apr-12
7x

Oct-12

Apr-13
4x

Source: Company, Angel Research

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Mahindra Satyam | 4QFY2013 Result Update

Exhibit 11: Recommendation summary

Company HCL Tech Hexaware Infosys Infotech Enterprises KPIT Cummins Mahindra Satyam MindTree Mphasis NIIT^ Persistent TCS Tech Mahindra Wipro Reco. Buy Buy Accumulate Accumulate Buy Buy Accumulate Reduce Buy Accumulate Accumulate Buy Accumulate CMP (`) 738 78 2,332 171 102 109 836 447 23 526 1,454 942 347 Tgt. price (`) 863 96 2,465 185 135 126 920 395 30 593 1,585 1,180 385 Upside (%) 17.0 23.2 5.7 8.4 31.8 15.4 10.1 (11.6) 33.3 12.7 9.0 25.3 10.9 FY2015E EBITDA (%) 20.7 18.8 27.7 17.7 15.5 20.1 19.2 17.4 9.1 25.0 27.9 18.1 20.6 FY2015E P/E (x) 12.0 6.9 12.8 7.8 7.3 9.6 9.1 10.8 4.2 8.9 16.5 8.2 12.2 FY2012-15E EPS CAGR (%) 19.6 8.3 7.9 14.7 20.3 0.9 19.8 3.3 (7.1) 18.7 17.4 10.7 7.9 FY2015E EV/Sales (x) 1.4 0.8 2.1 0.5 0.5 0.9 0.8 0.8 0.0 0.8 3.2 1.4 1.3 FY2015E RoE (%) 21.5 21.7 19.3 13.7 16.6 20.0 18.9 13.6 11.9 16.5 27.9 19.1 18.4

Source: Company, Angel Research; Note: ^Valued on SOTP basis

Company Background
Mahindra Satyam (erstwhile Satyam Computers) was incorporated by Raju brothers in 1987, with a strong focus on the manufacturing industry and the enterprise business solutions vertical. The Mahindra Group acquired Satyam in April 2009 after the erstwhile founders reported financial irregularities in January 2009 and it is now back on its growth track after two years of metamorphosis undertaken by Tech Mahindra's Management. The company's new Management took over its reins and has again put the company on the map of the Indian IT industry (sixth largest Indian IT services provider) with improved business flow, strong client mining and better margins.

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Mahindra Satyam | 4QFY2013 Result Update

Profit and loss statement (Consolidated, Indian GAAP)

Y/E March (` cr) Net revenues Employee costs Gross profit % to net sales SG&A expenses % to net sales EBITDA % to net sales Dep. and amortization % to net sales EBIT % to net sales Interest charges Other income PBT Tax % of PBT PAT Exceptional item Minority interest Final PAT Adj. PAT* EPS (`)* Note: * excluding exceptional item FY2011 5,145 3,594 1,551 30.1 1,096 21.3 455 8.8 185 3.6 270 5.3 10 294 555 58 10.4 497 641 3 (147) 494 4.2 FY2012 6,396 3,959 2,437 38.1 1,413 22.1 1,024 16.0 158 2.5 866 13.5 12 419 1,273 85 6.7 1,188 (109) (8) 1,306 1,197 11.1 FY2013E 7,693 4,516 3,178 41.3 1,545 20.1 1,632 21.2 190 2.5 1,443 18.8 13 318 1,747 412 23.6 1,335 160 10 1,164 1,324 9.9 FY2014E 8,278 4,900 3,378 40.8 1,697 20.5 1,681 20.3 207 2.5 1,474 17.8 12 254 1,717 464 27.0 1,253 16 1,237 1,237 10.5 FY2015E 9,062 5,381 3,681 40.6 1,858 20.5 1,823 20.1 227 2.5 1,597 17.6 12 301 1,886 528 28.0 1,358 16 1,342 1,342 11.4

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Mahindra Satyam | 4QFY2013 Result Update

Balance sheet (Consolidated, Indian GAAP)

Y/E March (` cr) Liabilities Share capital Share app. money pending allotment Reserves and surplus Total shareholders' funds Minority interest Loan funds Deferred tax liability Other long-term liability Long term provisions Sub-total Amt pending investigation suspense Total capital employed Assets Fixed assets Goodwill Investments Deferred tax asset Loans and advances Other current assets Current assets, loans and advances Inventories Sundry debtors Cash and bank balances Other current assets Loans and advances Less: Current liab. and provisions Sundry creditors Liabilities Provisions Net current assets Profit and loss account Sub-total Unexplained diff. suspense acc. (net) Total capital deployed 634 895 923 2,541 3,658 3,658 598 797 1,014 3,158 4,554 4,554 539 886 932 3,915 5,595 5,595 591 966 993 5,025 6,849 6,849 649 1,046 1,087 6,209 8,206 8,206 59 1,126 2,745 877 186 15 1,402 2,852 608 692 1,780 2,922 612 957 1,928 3,432 891 1,325 2,110 4,413 1,018 1,450 881 35 8 180 12 974 35 35 170 176 6 1,075 140 35 198 204 28 1,048 140 35 218 254 128 1,002 140 35 238 304 278 235 1,490 1,725 23 22 7 1 650 2,428 1,230 3,658 235 0 2,752 2,987 15 23 2 3 294 3,324 1,230 4,554 235 0 3,890 4,125 25 22 2 3 187 4,365 1,230 5,595 235 0 5,127 5,363 41 22 2 3 187 5,618 1,230 6,849 235 0 6,469 6,705 57 22 2 3 187 6,976 1,230 8,206 FY2011 FY2012 FY2013E FY2014E FY2015E

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Mahindra Satyam | 4QFY2013 Result Update

Cash flow statement (Consolidated, Indian GAAP)

Y/E March (` cr) Pre tax profit from operations Depreciation Pre tax cash from operations Other income/prior period ad Net cash from operations Tax Cash profits (Inc)/dec in current assets Inc/(dec) in current liabilities Net trade working capital Cash flow from operating activities (Inc)/dec in fixed assets (Inc)/dec in investments (Inc)/dec in deferred tax (Inc)/dec in other non-current assets Inc/(dec) in minority interest Cash flow from investing activities Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cash flow from financing activities Cash generated/(utilized) Cash at start of the year Cash at end of the year FY2011 261 185 445 294 740 58 679 (445) 30 (415) 263 (79) 627 1 3,210 (35) 3,724 (20) (3,399) (3,419) 568 2,177 2,745 FY2012 FY2013E FY2014E FY2015E 855 158 1,012 419 1,431 85 1,354 (468) (43) (511) 844 (251) (35) (167) (351) (804) 1 66 67 107 2,745 2,852 1,430 190 1,619 318 1,937 412 1,514 (633) (53) (686) 828 (291) (29) (146) (105) (570) (1) (104) (83) (187) 71 2,852 2,922 1,462 207 1,669 254 1,924 464 1,444 (794) 193 (601) 843 (180) (20) (134) (334) 83 (83) 0 509 2,922 3,432 1,585 227 1,811 301 2,112 528 1,568 (435) 232 (203) 1,365 (180) (20) (184) (384) 83 (83) 0 981 3,432 4,413

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Mahindra Satyam | 4QFY2013 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days 5.8 80 64 6.6 80 55 7.2 84 44 7.9 85 44 8.0 85 44 7.4 29.6 28.6 19.0 50.9 40.1 25.8 54.0 32.1 21.5 43.2 23.1 19.5 42.1 20.0 0.9 2.1 0.1 1.4 2.1 28.8 0.9 1.5 0.1 1.4 1.5 39.8 0.8 1.2 0.2 1.4 1.4 32.4 0.7 1.2 0.2 1.2 1.3 23.4 0.7 1.2 0.2 1.1 1.2 20.3 4.2 5.8 14.7 11.1 12.5 25.4 9.9 11.5 0.6 35.1 10.5 12.3 0.6 45.6 11.4 13.3 0.6 57.1 26.0 18.9 7.4 2.0 22.2 2.8 9.8 8.8 4.3 1.6 9.8 2.2 11.0 9.5 3.1 0.5 1.3 6.1 1.8 10.4 8.9 2.4 0.5 1.1 5.6 1.4 9.6 8.2 1.9 0.5 0.9 4.6 1.0 FY2011 FY2012E FY2013E FY2014E FY2015E

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Mahindra Satyam | 4QFY2013 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: [email protected]

Website: www.angelbroing.com

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Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Mahindra Satyam No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

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