Emkay Global Financial Services has retained `Hold` on Mahindra Satyam with a price target of Rs 80 as against the current market price (CMP) of Rs 76 in its report dated Feb. 31, 2012. The broking house gave the following rationale:
Strong headline numbers but weak on quality:
Mahindra Satyam (Q,N,C,F)* reported a below par revenue USD revenue performance at USD 325 million (-1.5% QoQ, significantly below Emkay est of USD 340 million) with INR revenue nos aided by a lower USD/INR realization rate of Rs 52.86/USD (V/s 51-51.5 for peers). Op profits and profits beat expectations by 5%/35% respectively aided by 90 bps sequential improvement in margins to 16.2% (despite wage increments and against expectations of flat margins) and higher other income (co reported other income of Rs 1,490 million V/s exp of Rs 590 million) We note that Dec`11 qtr marks the 2nd successive qtr of `strong reported numbers but weak on quality` for Mah Satyam. Op metrics performance was mixed with co reporting a decline a no of USD 10 million+ clients, however top 10/20 clients grew by 3.2%/1.6% sequentially. Similarly revenues from US were down by 6% sequentially while revenues from Europe/ROW grew by 2.3% QoQ each. HC addition was somber for the 2nd quarter in a row with co adding 188 people during the quarter to take the total HC to 32,280 with attrition remaining flat sequentially.
Deal pipeline remains healthy, however co defers FY12 campus joinings:
While Mah Satyam maintained that deal pipeline remains healthy, it noted that there were delays in client decision making akin to peers. While Mah Satyam`s new management has done well to resurrect the company post taking it over in April`11, we continue to see revenue growth challenges for the company which could get compounded in case of weak demand environment. We note that after reporting decent revenue traction in the previous qtrs, Mah Satyam`s revenue performance has lagged peers for 2 successive qtrs and we see challenges on that front, also confirmed by the fact that the company has decided to defer joining dates for 1,300 of the 5k campus offers for FY12.
Earnings upgrades driven solely by lower currency resets:
While we cut our USD revenue estimates (we now build in a 16%/13% y-o-y revenue growth V/s 19%/16% earlier), lower currency resets to Rs 49.5/USD for FY13 (V/s Rs 48/USD earlier) coupled with Q3 beat drive sharp 16%/6% raise in FY12/13E earnings to Rs 8.5/8.0 respectively (V/s Rs 7.3/7.5 respectively). Despite earnings beat, we see little reason to be enthused by Mah Satyam`s performance. Retain Hold, target price unchanged at Rs 80.
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