Wednesday, September 19, 2012

>MAHINDRA SATYAM: Large deal wins at Tech Mahindra (Contracted revenue from the captive acquisition)

With increasing participation in the US, traction continues to improve for Mahindra Satyam (M Sat). Further, we understand that M Sat’s internal margin thresholds for new deals are higher now, indicating a high focus on profitability. Tech Mahindra, on the other hand, is benefiting from many large deal wins. Moreover, while the perception is that of Tech Mahindra having ‘bought revenue’, our analysis shows that the company’s cash generation has been on par with larger vendors. Even its recent acquisition of a captive is cheaper than other captive acquisitions over the past two years. Consequently, we continue to be positive on M Sat/Tech

Incremental positives at M Sat: Our channel checks indicate that M Sat’s internal margin thresholds for new deals have increased in the recent past. This, along with steady renewals and increasing participation in US-related deals, gives us comfort over sustainability of margins and revenue growth.

Tech Mahindra has not ‘bought revenue’: Tech Mahindra’s large deal wins have been strong over the past year. Moreover, our analysis shows that in deals where Tech Mahindra had paid upfront, its cash generation has been on par with larger vendors. Further, for its recent
acquisition of a captive, implied valuations were cheaper than other captive acquisitions over the past two years.

Cheap valuations: We believe stable renewals, improving traction in the US, and margin levers will continue to result in robust Ebitda growth for M Sat. Tech Mahindra is benefiting from an improving market for telecom IT services and a buoyant and large deal pipeline. Almost all uncertainties related to M Sat’s legal liabilities have been addressed. Valuations of the combined entity continue to be cheaper than even some of the mid-tier IT companies at ~11x FY13ii PER. We are increasing our target price to Rs122. Re-iterate BUY.

Large deal wins at Tech Mahindra:
Tech Mahindra is benefiting from an improving demand for telecom related IT services and a robust large deal pipeline. Our channel checks indicate that Tech Mahindra has won two large deals in the past two months. This is in addition to the ~US$845m of contracted
revenue from the captive acquisition.

To read report in detail: MAHINDRA SATYAM