>Tech Mahindra Limited (MORGAN STANLEY)

Quick Comment: Emerges as Highest Bidder for Satyam

Impact on our views: We believe Tech Mahindra’s (TM) successful bid for Satyam gives it more elbow room to maneuver through the tough economic environment. Given its dependence on BT, TM’s move toward diversification is a sign of relief, in our view, and could be seen as a positive step for TM in the long run. However, the near-term impact remains uncertain due to a lack of visibility on Satyam’s financials, litigationrelated liabilities, earnings dilution for TM, and declining organic business for Satyam and TM. We would wait for management execution before turning more constructive on TM stock.

What's new: TM’s aggressive bid of Rs58 per share for Satyam has emerged as the high for a 31% stake in Satyam. TM’s bid is in line with its stated intention of aspiring to be one of top 5 offshore IT vendors. Satyam’s Financials are still unknown, but media reports indicate that its revenue run-rate could be ~US$1.6bn (to decline further to US$1.3bn per management) with operating profit of ~US$48mn (margin of 2.3-3.1%) and collections of ~US$130-150 per month. TM’s next move could be to take its stake up to 51% by making an open offer for a 20% stake at a price of at least Rs58 per share. TM had a cash balance of US$140mn at end-March 2009e, and the 51% Satyam stake should cost at least ~US$580mn, in our view.

What we like: 1) The Satyam stake would help Tech Mahindra expand its severely constrained vertical and service offerings, in our view. 2) The deal appears earnings dilutive, although margin improvement at Satyam could limit EPS dilution for TM.

What we don’t like: 1) Rising debt profile for TM and uncertainty with the existing clients of Satyam are the key risks for TM, in our view. 2) There could be litigationrelated liabilities for Satyam/TM. 3) Although the deal improves TM’s long-term prospects, turning around Satyam in the current environment with declining revenues could take longer than expected, in our view.

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