>MAHINDRA COMPUTER SERVICES LIMITED (FIRST GLOBAL)

Could Satyam be a Rs. 200 stock again? We would bet on it…

Given that we see its RoE in FY11 reach 24% (nearly the same as
Infosys’!), a below-sector P/BV of 2.4x looks way too cheap…

The Short Story…

Sometime in June it became clear to us that while Mr. Ramalinga Raju may have fudged more than a few figures here and there, the company he built was for real: the business, the clients, the revenues, in large part, really did exist…and now that the ‘overhang was gone, Mahindra Satyam (SCS.IN/SATY.BO) would slowly begin to be rerated as a regular IT services stock. We
turned bullish on it in June, as a classic contrarian bet, when the stock was Rs.66. We reasoned thus: this was classical mis-pricing: the stock had gotten way too cheap as people were focussed on what Ramalinga did, rather than focus on the fact that on the service delivery front, no client had any complaints of Satyam. Plus the class action issue seemed to be over-blown.

In hindsight, Satyam in June was the trade of the year…you were buying a quality business at
bargain basement valuations.

The good news is: despite nearly doubling from then, the stock still looks set to deliver strong gains over the next year or so.

We would not be in the least surprised if the stock makes its way back to the price at which the
Ramalinga letter hit the wire, back in Jan 2009…

Our base case estimates revenues of Rs.87 bn for FY11 - only marginally above the FY08 numbers - take us to an EPS of Rs.10.7. And a current P/E of merely 11.1x FY11 earnings. Given the Rupee depreciation since FY08, the FY11 revenue estimate is a full 14% BELOW the FY08 revenues. Even our ‘best case’ estimates are built on US Dollar revenues $1,954 mn, 8.7% below FY08 revenues. This gives an EPS of Rs.12.3 and P/E of 9.7x - well below that for sector comparables.

What’s even more compelling is that as per our estimates, Satyam’s FY11 RoE will be 24%...about in the same range as Infosys and Wipro…why then should there be such a big gap in their P/BV ratios? And the P/E gap is there to see, as the Table below clearly shows… Add to this the fact that there is greater room for upside surprise in Satyam than in any other IT services play…simply because of the problems of January ’09. It can win back old customers, win new customers, create growth in a sector that looks mature. Satyam is now a company with room for growth, strangely enough because of Ramalinga…

Think about it…

This one has still lots of juice left…

To see full report: MAHINDRA SATYAM COMPUTER