>Much awaited merger of Tech Mahindra and Mahindra Satyam has got finalised

The much awaited merger of Tech Mahindra and Mahindra Satyam has got finalised with the boards of the two entities having approved the proposal. The swap ratio for the merger is worked out to be 2 shares of Tech Mahindra (face value Rs10) for every 17 shares of Mahindra Satyam (face value of Rs2). As per the managements’ indication, the merger process will take another six to nine months to complete and the record date of the merger would be announced in due course.


Key synergies from the merger
The combined entity would be the fifth largest domestic IT company: The merged entity’s revenues are at around $2.4 billion for the last 12 months (ended December 2011), making it the fifth largest domestic IT company, next to HCL Technologies among the listed space. The entity would be the sixth largest when taking Cognizant Technologies into consideration. In terms of market capitalisation, the merged entity will be at around Rs17,000 crore.



■ Diversified revenue stream with strong domain expertise in focused areas: The merged entity’s revenue stream will be much diversified as compared to the current single industry (telecom) exposure of Tech Mahindra. The new entity’s revenue mix will comprise of sectors like banking, financial services and insurance (BFSI), manufacturing and telecom among others. On the other hand, the merged entity would derive synergies from strong capabilities of Tech Mahindra in mobility and system integration whereas the legacy strength of Satyam in the area of enterprise solutions would be the key differentiator for the merged entity. Among geographies, the revenue exposure will be more balanced with 42% accounted by the US, 35% by Europe and 23% by emerging markets.


■ Top client’s concentration will reduce; clients portfolio looks more diversified: Currently, British Telecom (BT) contributes close to 35% of the total revenues of Tech Mahindra, which is likely to reduce substantially to 16.5% in the new merged entity. Further, with around 217 Satyam clients adding to the joint entity, the joint entity will have over 350 clients.

■ Cost benefits to accrue from operational synergies: The joint “Go to market” strategy of the merged entit has already started bearing fruits, with both Tech Mahindra and Satyam working closely in the last one year as a joint entity for the market penetration. In the last one year, the merged entity has won more than 10 deals through this initiative. On the other hand, the joint entity would also have the scale and bandwidth to accrue benefits from the general and administrative (G&A) side of the expenses. Going forward, the management has indicated at an EBITDA margins of 16% from the combined entity.


■ Potential for higher investor participation with increase in free float: At present, Tech Mahindra is having a free float of shares of around 29.1%. Excluding LIC, which holds around 13%, the figure stands at 16.1%. In the merged entity, the free float available for the investors will increase to 50.5%. With increase in free float the investor participation in the merged entity will increase further. Through the merger process, 20.4 crore shares of Satyam will be transferred to Tech Mahindra Trust and 10.34 crore new shares will be issued. Post merger, Tech Mahindra Trust will hold a 10.4% stake in the new entity as treasury shares.


■ Other highlights
The management has indicated that C P Gurnani who led the Mahindra Satyam turnaround would be the chief executive officer (CEO) of the combined entity. Sanjay Anand will be the chief finance officer (CFO) and Vineet Nayyar would be the non-executive Chairman. Sriram Papani will lead the enterprise business solutions vertical, Nagesh Kamble will lead the consulting business and Karthikeyan Natarajan would lead the engineering services division. The heads of sales and leaders appointed for specific geographies are
expected to remain unchanged.


There would be no redundancy in respect of employees with the total workforce growing to 75,026 employees. Going ahead the management expects to add to the headcount on a net basis.
 
The in-organic route to growth would remain as the combined entity would look at acquisitions to fill in gaps in services and enter new markets.


Decision with regards to branding would be taken up in consultation of professional consultants.


■ Valuation: We view the merger of Mahindra Satyam with Tech Mahindra as a positive catalyst for creating a value accretive entity for the future. However, legal hurdles pending with Mahindra Satyam and slowdown in the telecom vertical (main industry exposure for Tech Mahindra) would stand to be a roadblock in the medium term. On a longer-term, the new entity will have a more diversified and scalable revenue stream and operational synergies will create value for the investors. At the current market price, both Tech Mahindra and Mahindra Satyam trade at 10x and 9x their FY2013E and FY2014E consensus earnings respectively. We continue to remain positively biased on Mahindra Satyam. Currently, we do not have any active rating on Tech Mahindra and Mahindra Satyam.


RISH TRADER

>ORBIT CORPORATION: Plans to launch a slum rehabilitation project, a new project at Napean Sea Road (60,000 sq ft) and another new project at Kemps Corner

Timely clearances of projects hold the key

■  Sales booking in Q4FY2012 likely to be better than Q3: Orbit Corporation (Orbit)’s management is expecting presales for Q4FY2012 to be better than in Q3FY2012. In Q3FY2012 the sales booking stood at Rs71.1 crore (32,921 sq ft) which was better than Q2FY2012’s presales of a measly Rs2.41 crore (9,034 sq ft). The company in the third quarter resorted to fire sale (ie bulk selling) in Orbit Laburnum at Gamdevi, Mumbai and Orbit Residency at Andheri-Saki Naka, Mumbai which drove the sales volume. Similarly in Q4FY2012, the company is looking at bulk sales in two of its properties viz Orbit Residency at Andheri, Mumbai and Orbit Terraces at Lower Parel, Mumbai which are at an advanced stage. It has also achieved sales in some of its other projects which would result in sales booking to be better sequentially.


■  New launches to kick in from Q1FY2013: With the amended Development Control Regulation (DCR) now in place, the company expects the approval process to be streamlined. Though the approvals have still not picked up, but the same are expected to gain momentum in a month’s time. As a result the company has
started applying for approvals for its existing under-construction projects, so that the execution can be ramped up. It will also soon start applying for newer projects so that they can be launched by end of Q1FY2013. Any further delay in getting clearances will impact the company’s financials and thus our estimates. The company plans to launch a slum rehabilitation project (SRA) in Santa Cruz (phase 1 of ~100,000 sq ft), a new project at Napean Sea Road (60,000 sq ft) and another new project at Kemps Corner (~100,000 sq ft) by H1FY2013. All of these planned projects are in Mumbai.


■  Looking out for partner in Santa Cruz SRA project: Orbit is in talks with a few property firms from Singapore for partnering in its planned Santa Cruz SRA project in Mumbai, the Orbit Grandeur. It might bring in a partner for project designing expertise or for investment in the project. However the discussions are at a very nascent stage and the deal will take time to materialise. If the discussions fall out as per plan then Orbit would be able to execute the project without any further debt raising.



 ■ Mandwa project to take 6-9 months to get approvals and clearances: The pending approvals and clearances for Mandwa will take approximately six to nine months, after which the company will launch the project and will be able to start construction work. Recently the project had come under the scanner of the Bombay Environmental Action Group (BEAG), which had complained to the Union Ministry of Environment and Forests (MoEF) about large-scale destruction of mangroves. However as per the environment secretary, an inspection of the area was carried out and there was no case of mangroves having been destroyed. The company had applied to the local collector's office for a recreational and tourism zone permit for 200 acres as the land was reserved for that purpose in the regional plan. However, the land is still recorded as agricultural land. It's now over a year since the application has been made, but the company has not received any permission so far. No construction work is being carried out at the site currently. The MoEF has carried out a survey and Orbit is awaiting the final decision from the union environment ministry. The project will not get impacted by BEAG’s allegations.

■  Maintain Buy: Poor sales across projects over the last one year due to regulatory uncertainties and absence of new launches due to pending approvals and clearances took a toll on the company. However there have been amendments in the DCR which now create a level playing field for developers and provide regulatory clarity. This will result in pending projects now getting approved, resulting in a pick-up in execution of projects along with launches of new projects. We expect the clearances to start coming in by the end of Q1FY2013. The next couple of quarters need to be keenly watched in terms of the cut in interest rate cycle and the progress on the approvals front for the company. Given the healthy land bank of the company, any quick revival on the clearances front will be a positive for the stock. Further any success in roping private equity in few of its projects will help the company improve its balance sheet. We maintain our Buy rating on the stock with a target price of Rs70. At the current market price, the stock trades at 7.8x its FY2013E earnings and 0.4x its FY2013E price to book value (P/BV).

RISH TRADER

>Talwalkars Better Value Fitness Limited (TBVFL)

Company Overview
Talwalkars Better Value Fitness Limited (TBVFL), is the largest chain of health centers in India having 115 health clubs spread across 56 cities and patronized by 113,000 members. Currently, it is promoted by the Talwalkar and Gawande groups together. Out of the total number of health clubs, 79 are owned by TBVFL, 10 are legacy gyms, 10 are part of subsidiary companies wherein TBVFL has a 51% holding, 6 are part of the JV with Pantaloon Retail and the remaining 10 are purely franchisee outlets operating under the HI FI brand targeting the Tier II and III cities.


Investment Rationale
■ Introduction of HI FI Gyms results in accelerated expansion at zero capex cost
TBVFL is well positioned to increase its penetration into various parts of the country with launch of the HI FI concept which is mainly targeting the middle income population in the Tier II and III cities. This has helped the company to promote its brand and create an awareness in the smaller cities and also increase the total number of health clubs at a faster rate. In case of the HI FI format, TBVFL does not require capex though the royalty component is similar to the subsidiary model and additional upfront income of Rs. 1mn resulting in higher revenue at zero capex and a faster roll out of health clubs.


■ Healthy sales growth supported by fast paced expansion and demographic mix
TBVFL is focused on increasing its total number of gyms particularly in HI-FI segment which is leading to faster expansion on account of its attractive business model. TBVFL being benefitted from a surge in the number of people aged 35-50 years who form a major portion of the population. We expect rising awareness of the need to be healthy and maintain one’s physical appearance will be the major reason for increase in membership. As per our projections, the sales are expected to grow at a CAGR of 19% from
FY11 to FY14.


■ Focus on franchisee Model to support RoCE going forward
TBVFL has a large gym base, in which the amount of capex varies depending on the level of ownership. This optimal mix of owned, subsidiaries and franchisees on a pan Indian basis would support RoCE going forward. As Franchisee model does not require capex, we believe the company’s focus is on expanding its franchisee network to support RoCE.


Valuation and Outlook
The stock is currently trading at a P/E of 11.9x, P/BV of 2.1x and an EV/EBIDTA of 7.2x its FY13 estimates. We have taken a discount of 30% to the average EV/EBITDA (8.9x) of its international peers as TBVFL is in a growth phase and operates in an emerging market. Thus we have arrived at an EV/EBIDTA multiple of 6.2x for valuing the company. Considering the strong business model and expansion plans coupled with increasing awareness of health and fitness, TBVFL is well poised to deliver high growth rate in the coming years and we expect it to grow by 30% and 29.7% for FY12E and FY13E respectively. We initiate the company with a ‘BUY’ rating arriving at a target price of Rs. 205 (an upside of 37%.).


To read full report: TBVFL
RISH TRADER

>HERCULES HOISTS LIMITED: Q3 FY12 Results Update

Hercules Hoists Ltd. has reported net profit of Rs 72.64 million for the quarter ended on December 31, 2011 as against Rs. 57.05 million in the same quarter last year, an increase of 27.33%. It has reported net sales of Rs 297.11 million for the quarter ended on December 31, 2011 as against Rs 275.23 million in the same quarter last year, a rise of 7.95%. Total income grew by 12.38% to Rs 315.26 million from Rs. 280.52 million in the same quarter last year. During the quarter, it reported earnings of Rs 4.54 a share.


To read full report: HERCULES
RISH TRADER