Friday, March 26, 2010

>SATYAM COMPUTERS: Up on its feet and running (BNP PARIBAS)

■ Retain BUY. Increased confidence in thesis after recent checks.

■ Deal wins still largely of small sizes, but momentum improving.

■ Attrition in check, hiring picking up, margins likely back on track.

■ DCF-TP of INR130.00. Risky, but compelling turnaround story.

Higher confidence after checks
Our latest round of checks on Satyam gives us increased confidence in our FY10 USD1.1b standalone revenue estimate and our thesis that the company should approach industry average growth and profitability by FY11. Since our last update, we believe that the business has improved, especially from February, partly due to an industry-wide revival. Apart from the recent wins such as the USD48m, deal from KMD and business from South Africa, Brazil and the Middle East, we believe Satyam continues to win short tenure projects, mostly from existing customers. In fact, the deal advisory firm, TPI lists Satyam among only a handful of Indian players that have won 10 or more contracts each greater than USD25m in 2009. The lack of audited financials remains an impediment to winning more large projects, which should change after June, in our view, when the company releases its FY09-10 results.

Operations now at a likely more “normal” level
1) We believe pricing continues to be at industry average levels because of the smaller sized projects that Satyam is working on, where it may have faced limited competition. 2) We believe attrition levels have subsided after the salary hikes in January and after news of another
round planned in April. 3) At its current headcount of a likely 22-23k (25- 26k incl. subsidiaries), Satyam appears well staffed and is possibly operates at a healthy utilization of over 70%. We believe therefore that it is well placed to improve its margins by our expected 9.3ppts in FY11. 4) We also believe Satyam has started hiring aggressively for about 2,000 positions in response to an increased pipeline, in our view. Our revised numbers are largely unchanged, but reflect higher utilization rates offset by higher wages (to retain talent), higher SG&A and a stronger USD/INR.

Risky, but investment case difficult to ignore
We acknowledge the risks that Satyam presents given the lack of audited financials and the near-term overhang of L&T likely selling its stake. However, we believe Satyam still makes for a compelling turnaround story and that the audited results could reflect a better picture than investors fear. We believe an eventual merger with Tech Mahindra would be synergistic and could re-rate both the stocks ahead of the event. We also estimate Satyam has about USD700m or 28% of its market cap in cash that it can use strategically. Finally, large cap IT stocks have rallied 14-19% from their YTD lows, while Satyam is up only 3%, hence presents a case for a catch-up. Retain BUY.

To read the full report: SATYAM COMPUTERS