Stock Market Result Update on Mahindra Satyam for 1QFY2012

Stock Market Result Update on Mahindra Satyam for 1QFY2012 with a Buy recommendation and a Target Price of `89 (12 months).

Mahindra Satyam (Satyam) reported its 1QFY2012 results, which were better than our as well as street estimations. The company is back on the growth track after two years of metamorphosis undertaken by TechMahindra’s management post its acquisition in June 2009. The company’s new management took over the reins and has again put the company on the map of the Indian IT industry.

We recommend a Buy rating on the stock.

Quarterly highlights: For 1QFY2012, Satyam reported strong dollar revenue growth of 5.2% qoq to US$320mn on the back of 3.9% qoq volume growth. In rupee terms, revenue came in at `1,434cr, up 4.3% qoq. The company’s EBITDA and EBIT margin increased by 168bp and 225bp qoq to 14.6% and 12.0%, respectively, aided by almost flat SG&A expenses qoq in terms of absolute number despite higher growth.

Outlook and valuation: The new management proved its ability of turning around the company in two years’ time by putting it back to comparable industry level growth and improving margins from 3% in FY2010 to 14.6% in 1QFY2012. We expect the company to maintain its growth momentum as recorded over the past few quarters and grow at rates comparable to its peers at a 19.4% CAGR in USD revenue and 32.5% CAGR in earnings over FY2011–13E. At the CMP of `71, the stock is trading at a 9.6x FY2013 EPS of `7.4 i.e. at a PEG of 0.29x. We value the stock at 40% discount to Infosys’ target FY2013 PE i.e., 12.0x and recommend a Buy rating on the stock with a target price of `89.