Tech Mahindra/Mahindra Satyam
Background
Started as Mahindra British Telecom (MBT) in 1986 as a 60-40 Joint Venture (JV) between Mahindra and Mahindra (M&M) and British Telecom (BT), Tech Mahindra focused exclusively on the telecom vertical with BT initially contributing 100% of its revenues. This revenue contribution from BT reduced to 72% at the time of IPO in July 2006. In April 2009, Tech Mahindra acquired 42.7% stake in the then troubled Satyam Computer Services for Rs 3,000 crore by purchasing 502 million equity shares at Rs 58 per share. Tech Mahindra has brought stability into Satyam’s business and since then Satyam has not seen any major client attrition.
Triggers
- Integrating Satyam will enable Tech Mahindra to participate in large deals, offer a strong expertise spread over different verticals and service lines and cross sell its service offerings to a much wider client base and eventually reduce dependence on British Telecom and AT&T.
- Over the last few years, the company has been successful in scaling up its Non-BT revenues. This has not only helped it offset the decline in BT revenues but also post an overall growth for the company.
- Recent acquisition of 100% stake in Hutchison Global services (sales of USD 170 million expected per year for the next five years) and 51% stake in Comviva (sales of USD 70 million in FY11) by Tech Mahindra would further improve growth and enhance service offerings.
- Acquisition of 51% stake in Complex IT by Mahindra Satyam in Feb 2013 for $23 mm to strengthen Enterprise offerings and expand presence in Brazil.
Concerns
- Legal cases pending against Mahindra Satyam would remain an overhang in the short term.
- Any aggressive ramp down by top client BT would drag down revenue growth.
Valuation & Recommendation
Based on post merger creation of fifth largest entity, sound balance sheet, good execution track record and steady improvement in the operational performance with strong growth & margin expansion, HDFC Securities assigns 11.5xFY14E EPS, which gives them a price target of Rs 1258.9. They feel investors could buy this scrip at current levels and add it on dips in the price band of Rs 986 - 1029 (9-9.4xFY14E EPS) for their price target over the next one to two quarters. Investors who purchase Mahindra Satyam can do so as its share price will move in tandem with that of Tech Mahindra until the final swap (ratio proposed 2:17) takes place. The merger is expected to complete by end of Q4FY13 or early Q1FY14.
Source: valuenotes.com
Background
Started as Mahindra British Telecom (MBT) in 1986 as a 60-40 Joint Venture (JV) between Mahindra and Mahindra (M&M) and British Telecom (BT), Tech Mahindra focused exclusively on the telecom vertical with BT initially contributing 100% of its revenues. This revenue contribution from BT reduced to 72% at the time of IPO in July 2006. In April 2009, Tech Mahindra acquired 42.7% stake in the then troubled Satyam Computer Services for Rs 3,000 crore by purchasing 502 million equity shares at Rs 58 per share. Tech Mahindra has brought stability into Satyam’s business and since then Satyam has not seen any major client attrition.
Triggers
- Integrating Satyam will enable Tech Mahindra to participate in large deals, offer a strong expertise spread over different verticals and service lines and cross sell its service offerings to a much wider client base and eventually reduce dependence on British Telecom and AT&T.
- Over the last few years, the company has been successful in scaling up its Non-BT revenues. This has not only helped it offset the decline in BT revenues but also post an overall growth for the company.
- Recent acquisition of 100% stake in Hutchison Global services (sales of USD 170 million expected per year for the next five years) and 51% stake in Comviva (sales of USD 70 million in FY11) by Tech Mahindra would further improve growth and enhance service offerings.
- Acquisition of 51% stake in Complex IT by Mahindra Satyam in Feb 2013 for $23 mm to strengthen Enterprise offerings and expand presence in Brazil.
Concerns
- Legal cases pending against Mahindra Satyam would remain an overhang in the short term.
- Any aggressive ramp down by top client BT would drag down revenue growth.
Valuation & Recommendation
Based on post merger creation of fifth largest entity, sound balance sheet, good execution track record and steady improvement in the operational performance with strong growth & margin expansion, HDFC Securities assigns 11.5xFY14E EPS, which gives them a price target of Rs 1258.9. They feel investors could buy this scrip at current levels and add it on dips in the price band of Rs 986 - 1029 (9-9.4xFY14E EPS) for their price target over the next one to two quarters. Investors who purchase Mahindra Satyam can do so as its share price will move in tandem with that of Tech Mahindra until the final swap (ratio proposed 2:17) takes place. The merger is expected to complete by end of Q4FY13 or early Q1FY14.
Source: valuenotes.com
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HDFC Sec Scrip ID
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Industry
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CMP
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Recommended Action
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Target
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Time Horizon
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TECMAHEQNR
|
IT
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Rs 1104.9
|
Buy at CMP and add on dips to Rs 986 to Rs 1029 band
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Rs 1258.9
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1-2 quarters
|
|
|
|
|
|
|
|
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HDFC Sec Scrip ID
|
Industry
|
CMP
|
Recommended Action
|
Target
|
Time Horizon
|
|
SATCOMEQNR
|
IT
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Rs 129.1
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Buy at CMP and add on dips to Rs 114 to Rs 119 band
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Rs 148.1
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1-2 quarters
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