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Please refer to important disclosures at the end of this report 1

Y/E March (` cr) 4QFY13 3QFY13 % chg (qoq) 4QFY12 % chg (yoy)Net revenue 1,936 1,940 (0.2) 1,666 16.2EBITDA 389 418 (7.0) 292 33.5

EBITDA margin (%) 20.1 21.6 (146)bp 17.5 260bp

Adj. PAT* 320 374 (14.4) 425 (24.6)Source:Company, Angel Research; Note: * excluding exceptional items

Mahindra Satyam (Satyam) reported in-line net profit for 4QFY2013 while

disappointed on the operational front. Volume growth was decent at 2.0% qoq.

The company added 60 new clients during the quarter. Satyam has declared

dividend of 30% (`0.6 per share) for the first time post 2009 crisis as the

turnaround for Satyam is symbolically complete and the company now seems to

be in good shape. We maintain our Buy rating on the stock.Quarterly highlights: For 4QFY2013, Satyam reported revenue of US$359mn, up0.8% qoq. In INR terms, the revenue came in at `1,936cr, down 0.2% qoq. The

companys EBITDA margin declined by 146bp qoq to 20.1%, owing to

normalization of provision reversal done in 3QFY2013. Adjusted PAT came in at

`320cr, down 14% qoq, impacted by lower other income of `72cr as against

`111cr in 3QFY2013.

Outlook and valuation: The new Management has proved its ability of turningaround the company in three years time by putting it back to comparable

industry level growth and improving margins from 8.3% in FY2010 to 16.0% inFY2012 and 21.2% in FY2013. Management cited that the company is getting

invited for more number of large deals but the win ratio of company still stands

much lower than the industry standards. To focus on this, the company has set up

a team to increase the momentum of deal wins. We expect the companys core

competence in EBS to supplement growth and post a 9.2% and 8.5% CAGR in

USD and INR revenue, respectively, over FY2013-15E. The Management

indicated that the proposed Tech Mahindra - Satyam merger had been approved

by the Bombay High Court, while it awaits the Andhra Pradesh High Court

approval. Management indicated that hearings at Andhra Pradesh High Court are

complete and the judgment has been reserved and expects that the judgment will

become available in the first two weeks of June. We value the stock at 11x FY2015EEPS, which gives a target price of `126. We maintain our Buy rating on the stock.Key financials (Consolidated, Indian GAAP)Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E FY2015ENet sales 5,145 6,396 7,693 8,278 9,062% chg (6.1) 24.3 20.3 7.6 9.5

Net profit* 494 1,197 1,324 1,237 1,342% chg 68.9 142.4 10.7 (6.6) 8.4

EBITDA margin (%) 8.8 16.0 21.2 20.3 20.1

EPS (`) 4.2 11.1 9.9 10.5 11.4P/E (x) 26.0 9.8 11.0 10.4 9.6

P/BV (x) 7.4 4.3 3.1 2.4 1.9

RoE (%) 28.6 40.1 32.1 23.1 20.0

RoCE (%) 7.4 19.0 25.8 21.5 19.5

EV/Sales (x) 2.0 1.6 1.3 1.1 0.9

EV/EBITDA (x) 22.2 9.8 6.1 5.6 4.6

Source: Company, Angel Research; Note: *Excluding exceptional items

BUYCMP `109

Target Price `126

Investment Period 12 Months

Stock Info

Sector

Net debt (`cr) (2,900)

Bloomberg Code SCS@IN

Shareholding Pattern (%)

Promoters 42.6

MF / Banks / Indian Fls 9.1

FII / NRIs / OCBs 30.4Indian Public / Others 17.9

Abs. (%) 3m 1yr 3yr

Sensex 11.5 26.3 19.1

Mahindra Satyam 49.9 57.6 24.0

Face Value (`)

IT

Avg. Daily Volume

Market Cap (`cr)

Beta

52 Week High / Low

12,853

0.6

2

131/66

BSE Sensex

Nifty

Reuters Code

20,247

6,170

SATY.BO

686,306

Ankita Somani+91 22 39387800 Ext: 6819

[email protected]

Mahindra SatyamPerformance highlights

4QFY2013 Result Update | IT

May 16, 2013

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Mahindra Satyam | 4QFY2013 Result Update

May 16, 2013 2

Exhibit 1:4QFY2013 performance (Consolidated, Indian GAAP)

Y/E March (` cr) 4QFY13 3QFY13 % chg (qoq) 4QFY12 % chg (yoy) FY2013 FY2012 % chg (yoy)Net revenue 1,936 1,940 (0.2) 1,666 16.2 7,693 6,396 20.3Direct costs 1,161 1,104 5.2 1,020 13.8 4,516 3,959 14.1Gross profit 775 836 (7.3) 645 20.0 3,178 2,437 30.4

SG&A expenses 385 417 (7.6) 354 8.9 1,545 1,413 9.4

EBITDA 389 418 (7.0) 292 33.5 1,632 1,024 59.4Dep. and amortizat ion 61 36 69.7 42 47.6 190 158 20.2

EBIT 328 382 (14.2) 250 31.1 1,443 866 66.5

Interest charges 4 3 23.6 3 59.3 13 12 13.1

Other income 72 111 73 318 419

PBT 396 490 (19.2) 320 23.7 1,747 1,273 37.2

Tax 75 112 (33.3) (94) (179.4) 412 85 384.2

PAT 321 378 (14.9) 414 (22.5) 1,335 1,188 12.3

Exceptional item (134) 294 (109) 160 (109)

Minority interest 1 4 (68.4) (10) (111.5) 10 (8) (224.1)

Final PAT 454 80 467.8 534 (15.0) 1,164 1,306 (10.9)

Adj. PAT* 320 374 (14.4) 425 (24.6) 1,324 1,197 10.7EPS* (`) 3.9 0.7 467.8 4.5 (15.0) 9.9 11.1 (10.9)

Gross margin (%) 40.0 43.1 (306)bp 38.7 127bp 41.3 38.1 321bp

EBITDA margin (%) 20.1 21.6 (146)bp 17.5 260bp 21.2 16.0 521bp

EBIT margin (%) 16.9 19.7 (277)bp 15.0 193bp 18.8 13.5 522bp

PAT margin (%) 15.9 18.2 (230)bp 24.4 (850)bp 16.5 17.6 (103)bp

Source: Company, Angel Research; Note: *Excluding exceptional items

Exhibit 2:Actual vs Angel estimates

(` cr) Actual Estimate % Var.Net revenue 1,936 1,964 (1.4)

EBITDA margin (%) 20.1 21.7 (156)bp

PAT 320 312 2.7

Source: Company, Angel Research

Soft results

For 4QFY2013, Satyam reported revenue of US$359mn, up 0.8% qoq, majorly

led by a 2.0% qoq volume growth. Cross currency movement impacted the dollar

revenue growth negatively. In INR terms, the revenue came in at `1,936cr, down

0.2% qoq. In INR terms, IT services revenue grew by 1.2% qoq to `1,890cr. BPO

reported a 28% qoq decline in revenues after a 17.9% qoq jump seen in revenues

in 3QFY2013.

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Exhibit 3:Trend in revenue growth (qoq)


Industry-wise, the companys anchor industry segment, manufacturing, led the

companys growth during the quarter by posting 10.2% qoq growth in revenues.

Management indicated that the deal pipeline in manufacturing industry vertical

continues to be strong particularly in the US. In Europe, countries such as

Germany, France and Sweden are showing good signs of growth in terms of

revenues from manufacturing vertical and expect APAC to continue to be a strong

contributor in manufacturing. Revenues from BFSI and retail & logistics (which were

major growth drivers in 3QFY2013) declined by 3.0% and 5.7% qoq, respectively.

The decline in revenues from retail is because in the last quarter retail had a one

time in the BPO space and that one-off revenue got over during this quarter. Thetechnology, media and entertainment (TME) industry segment reported a 1.4% qoq

growth in revenues. The company is witnessing IT spending from retail and

manufacturing clients who are focusing on cutting costs and driving efficiencies. In

BFSI, IT spend is coming from areas such as risk, compliance management and

regulatory issues. The Management indicated that they are hopeful of pickup in

revenue growth in FY2014 aided by new logo wins and deal wins across all the

industry segments.

Exhibit 4:Growth in industry segments

Particulars % to revenue % growth (qoq) % growth (yoy)Manufacturing 36.0 10.2 22.5

TME (includes telecom also) 22.1 1.4 14.6

BFSI 19.2 (3.0) 10.0

Retail and logistics 11.2 (5.7) 10.8

Healthcare and lifesciences 5.2 (12.5) (5.7)

Others 6.2 (10.6) (38.6)


Geography-wise, growth was led by America, the revenue from which grew by

4.9% qoq. Revenue from Europe was soft with 7.4% qoq decline. The Management

indicated that the deal pipeline remains healthy from emerging geographies,where MNCs are trying to expand their footprints.

332

342

354 356359

2.2

2.9

3.5

0.6

0.8

0

1

2

3

4

300

310

320

330

340

350

360

370

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

(%)

(US$mn)

Revenue (US$mn) qoq growth (%)

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Exhibit 5:Growth trend in geographies

Particulars % to revenue % growth (qoq) % growth (yoy)Americas 54.0 4.9 15.3

Europe 22.0 (7.4) (0.2)RoW 24.0 1.0 4.5


Hiring and client metrics

During the quarter, the company witnessed reduction of 889 employees, taking its

total employee base to 36,067 as the company working towards resource

optimization. The attrition rate of the company increased to 14.3% from 13.1% in

3QFY2013. The company has give 2,000 offers to campus graduates for CY2014

and going ahead lateral hiring will be done keeping in mind the demand scenario

and signs from the macroeconomic environment.

Exhibit 6:Employee metrics

Particulars 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13Net employee addition 1,073 2,643 791 169 (889)

Total employees 33,353 35,996 36,787 36,956 36,067

Attrition (%) 15.0 14.1 13.1 13.1 14.3


The companys client metrics saw some qualitative movement with clients getting

added in higher revenue brackets. The company witnessed addition of two clientsin US$20mn-50mn revenue bracket. The total active client base of the company

stood at 385 as against 368 in 3QFY2013. The companys growth was driven by

top 5 clients which reported revenue growth of 4.7% qoq while growth from non

top 10 clients remained tardy with non top-10 clients posting just 0.8% qoq

revenue growth. The company added 60 new clients during the quarter.

Exhibit 7:Client metrics

Particulars 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13Total active clients 314 372 363 368 385

US$1mn5mn 83 94 101 98 95

US$5mn10mn 13 21 23 23 26

US$10mn20mn 17 14 15 17 13

US$20mn50mn 13 12 10 11 13

US$50mn+ 3 4 5 5 5


Operating margins decline

During the quarter, the companys EBITDA margin declined by 146bp qoq to

20.1%, owing to normalization of provision reversal done in 3QFY2013 (one-off

provision reversal of `35.5cr done in 3QFY2013 on account of certain approvals

accrued towards employee bonus). EBITDA margin for FY2013 expanded by

520bp with forex contributing ~370bp of the margin expansion and operation

improvements the remaining. Management commentary indicated increased

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May 16, 2013 5

confidence in maintaining margins at similar levels on a constant currency basis.

Going ahead, the Management indicated that it will keep focusing on three

margin levers: 1) employee pyramid rationalization, 2) utilization improvement

and 3) G&A efficiencies. However, each of these levers has limited slack goingforward.

Exhibit 8:Margin profile


PAT came in at `454cr, aided by one-time exceptional gain of `134cr. Adjusted

net profit declined by 14% qoq impacted by lower other income of `72cr as

against `111cr in 3QFY2013. Over the last two years Satyam had a number of

exceptional items with some like class action suit having cash impact. We note that

going forward predictability of earnings would be higher as most provisions/class

action suit/reversals are done with.

Outlook and valuation

The new Management has proved its ability of turning around the company in

three years time by putting it back to comparable industry level growth and

improving margins from 8.3% in FY2010 to 16.0% in FY2012 and 21.2% in

FY2013. Satyam has declared dividend of 30% (`0.6 per share) for the first time

post 2009 crisis as the turnaround for Satyam is symbolically complete and the

company now seems to be in good shape.

Management cited that the company is getting invited for more number of large

deals but the win ratio of company still stands much lower than the industry

standards. To focus on this, the company has set up a team to increase the

momentum of deal wins. Management indicated that it sees better revenue growth

in FY2014 aided both by decent logo wins and healthy deal pipeline across

verticals such as manufacturing, retail and healthcare.

Satyam has successfully addressed its key concern areas in the past three years of

client mining, employee retention, margin expansion, and dispute resolution.

Satyam has enterprise business solutions (EBS; ~40% of its revenue) and

manufacturing (~34% of its revenue) showing modest traction. The company

expects this service and vertical respectively to bolster growth and help it to track

the industrys growth rate. We expect the companys core competence in EBS to

38.741.1 41.0 43.1 40.0

17.5

21.7 21.5 21.620.1

15.019.1 19.3

19.7

16.9

10

15

20

25

30

35

40

45

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

(%)

Gross margin EBITDA margin EBIT margin

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May 16, 2013 6

supplement growth and post a 9.2% and 8.5% CAGR in USD and INR revenue,

respectively, over FY2013-15E.

The Management indicated that the proposed Tech Mahindra - Satyam merger

had been approved by the Bombay High Court, while it awaits the Andhra Pradesh

High Court approval. Management indicated that hearings at Andhra Pradesh

High Court are complete and the judgment has been reserved and expects that the

judgment will become available in the first two weeks of June.

On the operating front, Management still believes that further improvement in

employee utilization, experience pyramid and SG&A leverage will help mitigate

some of the margin headwinds in constant currency. However, each of these levers

has limited slack going forward and would not derive any meaningful uptick in

operating margins from current levels. We expect EBITDA margin to be at 20.3%

and 20.1% in FY2014 and FY2015 from 21.2% in FY2013. At the current market

price of `109, the stock is trading at 9.6x FY2015E EPS of `11.4. We value thestock at 11x FY2015E EPS, which gives a target price of `126. We maintain ourBuy rating on the stock.Exhibit 9:Key assumptionsParticulars FY2014 FY2015Revenue growth - USD terms (%) 9.0 9.4

Revenue growth - INR terms (%) 7.6 9.5

EBITDA margin (%) 20.3 20.1

EBIT margin (%) 17.8 17.6

Tax rate (%) 27.0 28.0EPS growth (%) 6.3 8.4


Exhibit 10:One-year forward PE(x) chart


0

20

40

60

80

100

120

140

160

180

200

Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-1

(`)

Price 16x 13x 10x 7x 4x

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Exhibit 11:Recommendation summary

Company Reco. CMP Tgt. price Upside FY2015E FY2015E FY2012-15E FY2015E FY2015E(`) (`) (%) EBITDA (%) P/E (x) EPS CAGR (%) EV/Sales (x) RoE (%)

HCL Tech Buy 738 863 17.0 20.7 12.0 19.6 1.4 21.5Hexaware Buy 78 96 23.2 18.8 6.9 8.3 0.8 21.7

Infosys Accumulate 2,332 2,465 5.7 27.7 12.8 7.9 2.1 19.3

Infotech Enterprises Accumulate 171 185 8.4 17.7 7.8 14.7 0.5 13.7

KPIT Cummins Buy 102 135 31.8 15.5 7.3 20.3 0.5 16.6

Mahindra Satyam Buy 109 126 15.4 20.1 9.6 0.9 0.9 20.0MindTree Accumulate 836 920 10.1 19.2 9.1 19.8 0.8 18.9

Mphasis Reduce 447 395 (11.6) 17.4 10.8 3.3 0.8 13.6

NIIT^ Buy 23 30 33.3 9.1 4.2 (7.1) 0.0 11.9

Persistent Accumulate 526 593 12.7 25.0 8.9 18.7 0.8 16.5

TCS Accumulate 1,454 1,585 9.0 27.9 16.5 17.4 3.2 27.9

Tech Mahindra Buy 942 1,180 25.3 18.1 8.2 10.7 1.4 19.1

Wipro Accumulate 347 385 10.9 20.6 12.2 7.9 1.3 18.4

Source: Company, Angel Research; Note: ^Valued on SOTP basis

Company Background

Mahindra Satyam (erstwhile Satyam Computers) was incorporated by Raju brothers

in 1987, with a strong focus on the manufacturing industry and the enterprise

business solutions vertical. The Mahindra Group acquired Satyam in April 2009

after the erstwhile founders reported financial irregularities in January 2009 and it

is now back on its growth track after two years of metamorphosis undertaken by

Tech Mahindra's Management. The company's new Management took over its

reins and has again put the company on the map of the Indian IT industry (sixth

largest Indian IT services provider) with improved business flow, strong client

mining and better margins.

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Profit and loss statement (Consolidated, Indian GAAP)

Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E FY2015ENet revenues 5,145 6,396 7,693 8,278 9,062Employee costs 3,594 3,959 4,516 4,900 5,381Gross profit 1,551 2,437 3,178 3,378 3,681

% to net sales 30.1 38.1 41.3 40.8 40.6

SG&A expenses 1,096 1,413 1,545 1,697 1,858

% to net sales 21.3 22.1 20.1 20.5 20.5

EBITDA 455 1,024 1,632 1,681 1,823% to net sales 8.8 16.0 21.2 20.3 20.1

Dep. and amortization 185 158 190 207 227

% to net sales 3.6 2.5 2.5 2.5 2.5

EBIT 270 866 1,443 1,474 1,597

% to net sales 5.3 13.5 18.8 17.8 17.6

Interest charges 10 12 13 12 12

Other income 294 419 318 254 301

PBT 555 1,273 1,747 1,717 1,886

Tax 58 85 412 464 528

% of PBT 10.4 6.7 23.6 27.0 28.0

PAT 497 1,188 1,335 1,253 1,358

Exceptional item 641 (109) 160 - -

Minority interest 3 (8) 10 16 16

Final PAT (147) 1,306 1,164 1,237 1,342

Adj. PAT* 494 1,197 1,324 1,237 1,342EPS (`)* 4.2 11.1 9.9 10.5 11.4

Note: * excluding exceptional item

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Balance sheet (Consolidated, Indian GAAP)

Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E FY2015ELiabilitiesShare capital 235 235 235 235 235Share app. money pending allotment - 0 0 0 0

Reserves and surplus 1,490 2,752 3,890 5,127 6,469

Total shareholders' funds 1,725 2,987 4,125 5,363 6,705Minority interest 23 15 25 41 57

Loan funds 22 23 22 22 22

Deferred tax liability 7 2 2 2 2

Other long-term liability 1 3 3 3 3

Long term provisions 650 294 187 187 187

Sub-total 2,428 3,324 4,365 5,618 6,976Amt pending investigation suspense 1,230 1,230 1,230 1,230 1,230

Total capital employed 3,658 4,554 5,595 6,849 8,206AssetsFixed assets 881 974 1,075 1,048 1,002

Goodwill 35 35 140 140 140

Investments - 35 35 35 35

Deferred tax asset 8 170 198 218 238

Loans and advances 180 176 204 254 304

Other current assets 12 6 28 128 278

Current assets, loans and advancesInventories 59 15 - - -

Sundry debtors 1,126 1,402 1,780 1,928 2,110

Cash and bank balances 2,745 2,852 2,922 3,432 4,413

Other current assets 877 608 612 891 1,018

Loans and advances 186 692 957 1,325 1,450

Less: Current liab. and provisions

Sundry creditors 634 598 539 591 649

Liabilities 895 797 886 966 1,046

Provisions 923 1,014 932 993 1,087

Net current assets 2,541 3,158 3,915 5,025 6,209Profit and loss account - - - - -

Sub-total 3,658 4,554 5,595 6,849 8,206Unexplained diff. suspense acc. (net) - - - - -

Total capital deployed 3,658 4,554 5,595 6,849 8,206

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Cash flow statement (Consolidated, Indian GAAP)

Y/E March (` cr) FY2011 FY2012 FY2013E FY2014E FY2015EPre tax profit from operations 261 855 1,430 1,462 1,585

Depreciation 185 158 190 207 227Pre tax cash from operations 445 1,012 1,619 1,669 1,811

Other income/prior period ad 294 419 318 254 301

Net cash from operations 740 1,431 1,937 1,924 2,112

Tax 58 85 412 464 528

Cash profits 679 1,354 1,514 1,444 1,568

(Inc)/dec in current assets (445) (468) (633) (794) (435)

Inc/(dec) in current liabilities 30 (43) (53) 193 232

Net trade working capital (415) (511) (686) (601) (203)

Cash flow from operating activities 263 844 828 843 1,365(Inc)/dec in fixed assets (79) (251) (291) (180) (180)

(Inc)/dec in investments 627 (35) - - -

(Inc)/dec in deferred tax 1 (167) (29) (20) (20)

(Inc)/dec in other non-current assets 3,210 (351) (146) (134) (184)

Inc/(dec) in minority interest (35) - (105) - -

Cash flow from investing activities 3,724 (804) (570) (334) (384)Inc/(dec) in debt (20) 1 (1) - -

Inc/(dec) in equity/premium (3,399) 66 (104) 83 83

Dividends - - (83) (83) (83)

Cash flow from financing activities (3,419) 67 (187) 0 0Cash generated/(utilized) 568 107 71 509 981

Cash at start of the year 2,177 2,745 2,852 2,922 3,432

Cash at end of the year 2,745 2,852 2,922 3,432 4,413

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Key ratios

Y/E March FY2011 FY2012E FY2013E FY2014E FY2015EValuation ratio (x)P/E (on FDEPS) 26.0 9.8 11.0 10.4 9.6P/CEPS 18.9 8.8 9.5 8.9 8.2

P/BVPS 7.4 4.3 3.1 2.4 1.9

Dividend yield (%) - - 0.5 0.5 0.5

EV/Sales 2.0 1.6 1.3 1.1 0.9

EV/EBITDA 22.2 9.8 6.1 5.6 4.6

EV/Total assets 2.8 2.2 1.8 1.4 1.0

Per share data (`)EPS 4.2 11.1 9.9 10.5 11.4

Cash EPS 5.8 12.5 11.5 12.3 13.3

Dividend - - 0.6 0.6 0.6

Book value 14.7 25.4 35.1 45.6 57.1

Dupont analysisTax retention ratio (PAT/PBT) 0.9 0.9 0.8 0.7 0.7

Cost of debt (PBT/EBIT) 2.1 1.5 1.2 1.2 1.2

EBIT margin (EBIT/Sales) 0.1 0.1 0.2 0.2 0.2

Asset turnover ratio (Sales/Assets) 1.4 1.4 1.4 1.2 1.1

Leverage ratio (Assets/Equity) 2.1 1.5 1.4 1.3 1.2

Operating ROE 28.8 39.8 32.4 23.4 20.3

Return ratios (%)RoCE (pre-tax) 7.4 19.0 25.8 21.5 19.5

Angel RoIC 29.6 50.9 54.0 43.2 42.1

RoE 28.6 40.1 32.1 23.1 20.0

Turnover ratios (x)Asset turnover (fixed assets) 5.8 6.6 7.2 7.9 8.0

Receivables days 80 80 84 85 85

Payable days 64 55 44 44 44

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May 16 2013 12

Research Team Tel: 022 - 3935 7800 E-mail: [email protected] Website: www.angelbroing.com

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Disclosure of Interest Statement Mahindra Satyam

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors

Documents

Satyam 4Q FY 2013