Tech Mahindra - It was Satyam Once Upon!

Mahindra Satyam is a well-known IT firm in india, and is well known for the “(a)satyam” part of it.

I got interested in it after going through Safir Anand’s wordpress blog (http://safirpicks.wordpress.com/). Got doubly interested after finding that the same has been recommended by PN Vijay as his multibagger on 3rd of december at a price of 101 (CMP 107) with a target of 140 odd.

To me seems like a good 1 yr 30-40% gain type of stock.

Copy-pasting the story from

http://poweryourtrade.moneycontrol.com/plus/multibagger/multibagger_promo.php?autono=3091&utm_source=headlinepnvijay

Mahindra Satyam is a leading information, communications and Technology Company providing top-class business consulting, information technology and communication services. The company has had an eventful past. Mahindra Satyam is currently trading at undemanding valuations of ~10x FY13E EPS and ~9x FY14E EPS. At the CMP of Rs.102, we recommend buying it with a target price of Rs.140.

Mahindra Satyam

Company Overview:

Mahindra Satyam is a leading information, communications and Technology Company providing top-class business consulting, information technology and communication services. The company has had an eventful past. Till a few years ago it was considered one of the top IT companies of the country. However in Jan 2009, a major scam was discovered in the company by the owners and this led to a dramatic fall in the value of the shares. Then under a Government supervised bidding process, the company changed hands and was taken over by Tech Mahindra. It is now doing well and will soon merge with Tech Mahindra

Financial Analysis:

Mahindra Satyam reported healthy Q2FY13 numbers with the margins being a big positive surprise. Q2FY13 US$ revenues grew 3.5% QoQ to USD 354 million ($342 million in Q1) while that in rupees grew 3.1% QoQ to Rs.1938 Crs. PAT declined 21% QoQ to Rs.278 Crs vs. Rs.352.3 Crs in Q1. Sequential PAT decline was primarily due to forex loss of Rs.86 Crs in Q2 vs. Rs.67 Crs gain in Q1.

EBITDA margins were ahead of street estimate and declined a modest 15 bps QoQ despite the wage hike impact. It stood at 21.6% in H1FY13 vs 16% in FY12. The impact of wage hike on margins was more than offset by operational efficiencies.

Positives:

We like the stock because of the following reasons ï

The proposed Tech Mahindra - Satyam merger has been approved, the ratio being 1:8.5.

We believe the joint go-to-market strategy with Tech Mahindra and Mahindra Group expertise, particularly in the manufacturing space, will drive further growth.

The company has successfully addressed its key concern areas in the past three years of client mining, employee retention, margin expansion, and dispute resolution.

Robust deal pipeline with new 38 clients during the quarter.

It enjoys Healthy margins and strong execution.

**Valuations: **

Q2FY13 was a quarter of healthy operating performance and strong execution for Mahindra satyam. Going forward, the healthy revenue growth and sustained EBIT margins should continue. Mahindra Satyam is currently trading at undemanding valuations of ~10x FY13E EPS and ~9x FY14E EPS. At the CMP of Rs.102, we recommend buying it with a target price of Rs.140.

Hi Subash,

I will not bet on this or any of the IT companies for that matter. Look at how Hexaware was mauled when they came out with information on one client reducing spends. The current environment of 4-5% topline growth is not supportive for so many companies to growth their toplines.

I foresee the performance of these companies to be lacklusture over the next 1-2 years. Yes the multiples of mahindra satyam ,polaris,zensar etc are alluring but then i think those are justified.

Sunil

If the merger ratio has been fixed, shouldn’t the stock move inline with the change in Tech Mahindra’s stock price?

Good choice n timing n profits . Congrats Safir n Subhash.

Hi,

seems like Tech mahindra broke out of flag pattern.

flag Pole height - 900

Targets can be 2800 in medium term.


Hi,

Tech Mahindra came out with impressive results for fourth quarter. The dollar revenue grew 18% yoy and in INR terms the growth was 34%. The dollar revenue growth has been consistently over 17% in the last 4 quarters.

The com won new deals worth 1.2b USD in the last 4 quarters which is 40% higher than previous year. 45% revenue from USA and Telecom vertical contributes 49%.

Three drivers for sale playing out as per Macquarie:

  1. Growth revival in telecom spends through analysis of proprietarydata for US and European telecom service providers.

  2. Growth in enterpriserevenues from the Satyam acquisition.

3)Tech Mahindraâs M&A strategy.

They have also given an EPS estimate of Rs 130 for FY15 and 154 for FY16. At Rs 1800 the com is available less than 14 times FY15 earnings.

With the market neglecting IT and other export oriented companies there could be an opportunity to take a contrarian call here.

Views invited from IT experts. If we can establish that the first 2 growth drivers i.e Telecom revival in the west leading to higher IT spend and Satyam business growth we can make a good case.

Cheers

Vinod

Hi Vinod,

The company did an EPS of 125 (Baisc) & 121 (Diluted) for FY13-14.

With this kind of outlook for the business, what’s keeping EPS estimate for FY15 & 16 so low ? Is it concerns on currency or something else that am missing ?

Regards

Thanks Vinod - I think it is a very timely flag-up by you. However we need to several checks on the ground - fortunately we should be able to that easily - I would think even within the ValuePickr community IT industry members - hopefully.

Hi IT Industry ValuePickrs,

I am hearing good things about Tech Mahindra - from my Telecom Industry friends - on how the TElecom Vertical is set to outperform every other player including the IBM’s and Accentures of the World

I am starting to check with my IT industry friends too - on the Enterprise Segment prospects - essentially the erstwhile Satyam segment - which has been reportedly growing very well? 30-40% increase in deal pipeline and steady quarter on quarter growths for last many quarters - outstripping peer growths. I would imagine bulk of it might be coming from the Enterprise segment??

Can VP community - do some scuttlebutt on its own - locate friends within the Industry and the specific business -who may confirm or negate these reported developments??

That shouldn’t be tough to get at, if the community goes at it - ~40% of our current 6000+ strong community are from the IT segment.

One of my IT friends told me they are hiring heavily in the Netherlands. Though it’s really hard for anyone I know to know any kind of info on revenue growth rate projections.

The co has been growing heavily. I am also unsure what is keeping the projections on EPS low.

don’t forget the M&A activity - Comviva acquisition and others; besides one-off projects just concluded in Q4, etc

Not sure how much value this post may have as it slightly off topic - but here is my view as an HR professional. Tech M seems to be focusing on its strength in telecom vertical for potential growth and hiring top sales talent from major telecom equipment manufactures and telecom/ datacentre solution providers like cisco/juniper. Guys like cisco/ juniper/brocade is a very critical partner for telecom providers and sales leaders over there has very good relations/ influence with telecom service provider like Telstra, Vodafone.

Now looking at sales leaders in at tech m, we can see many ex-cisco personals like kumar GB âwho was sales leader and experience as MD capacity in APAC for cisco. With fixstream network acquisition, Sameer padhye, ceo of fixstream Network would also come on tech m board â Sameer padhye worked as leader in marketing and service solutions for cisco.

Guys like kumar and Sameer is very familiar @ major telecoms like Telstra, Vodafone, and even our own bharti. Iâm quite sure that these new leaders will surely have some influence in deal making process with major telecom service providers.

Also, after tech m- satyam merger it looks like there is good oppurtunity in mine customers andcross selling.

disc: I hold tech m.

1 Like

Some time back there was this talk about IBM-Airtel deal getting broken up and to benefit TCS & TechM. But didn’t see any follow up reports in media after that, not sure what happened on this.

I have been working in the Telecom domain since the last few years. Will network with friends in Tech M and Mahindra Satyam for more information. Here are my 2 cents on the issue:

On Telecom set to outperform:

)- While it is true that there is a lot of flux in Telecom currently, due to a host of new technologies - Smartphones, M2M, Net Neutrality, etc. and all this does lead to changes in Telco’s ecosystems.

)- Also it seems that world over, Telecom companies are now slowly becoming stronger.

)- Tech M undoubtedly is the best Telecom SI in India.

Some negatives to consider in Telecom/Tech M:

)- Earnings have increased, but are largely based on data only. There havent been any changes in telco’s core business model - though the ground is set for some change.

)- Archaic software systems are still working well for most players and there is no immediate requirement for change.

)- Having said that, traditionally firms like Tech M have been very strong at the software part of Telecom IT infrastructure and not the hardware side. The money to be made is also there on the software and not the hardware businesses.

)- Absence of good proprietary software products that could cater to telcos means that Tech M like firms usually end up working only as system integrators and service providers - which is ‘comparatively’ - a low margin business.

)- Tech M went through a phase of large scale purging in the last few years. Large teams were dissolved and lots of people were thrown out between 2011-13. Their HR/organization policies are probably the worst in the industry too - at least amongst the top players.

Another company to look at while discussing any growth in Telecom sector is Subex Ltd. It is a product company which sells revenue assurance products for telecom.

A bad acquisition led it to a single digit stock price from a high of Rs.800. Its still highly regarded in telecom circles though.

Thanks Augustine and Janit,

Your posts are the most value-added posts - as they add domain knowledge/understanding - which is harder to come by - than any analysis of numbers :slight_smile:

So everyone please dont hesitate or have doubts over the usefulness of the kind of info you have started putting up. This I am sure will inspire others in the vP community to speak up and add to better incremental understanding of the domain and industry prospects, and competitive strengths/positioning of individual players.

VP community knowledge base of IT industry/players needs quick shoring up. Hope many more start adding their bits.

Hi Donald,

@ Enterprise Segment prospects. I donât know how TechM is doing on this front, but in general for IT I can say that any company that is focussed on Infrastructure Mgmt. Services (IMS) or that derives major portion of their revenues from IMS should do very well.

Enterprise segment is a part of Infrastructure Mgmt. Services (IMS) which also includes Server Mgmt., Storage Mgmt. (storage modernisation and consolidation, disaster recovery and mgmt., backup, etc.,) along with Enterprise Networking (data center consolidation, virtualisation, cloud and mobility, etc.,).

The Savings that can be made by clients by transforming their Infrastructure landscape is huge. I see a lot of potential in this segment as clients are willing to invest/spend to transform/modernize/consolidate/manage their infrastructure as the ROIs on such investments is huge and the payback periods are very short too.

I can say the above as I work as a Business Consultant for one of big global IBs. Although Iam not a technology guy and it is not my forte, but I had to spend some time working on an assignment where I had to build a Business Case to ascertain the Savings and ROIs for such an investment/spend being made to modernize and consolidate the infrastructure (replacing the physical servers with virtual servers, consolidation of databases, etc.,) and the Savings were huge and clients are more than willing to make such investments. An IB has hundreds of big and small applications and the savings on just few applications was resulting into millions of $ saved.

Apart from the savings/cost rationalization and reduction of operational risks (very important factor for BFS clients) there are other factors like availability, performance and scalability that drive such investments/spends by clients on the IMS space.

Hence, I believe that TechM or any IT company catering to the above space has a huge scope of growth in future.

But please remember that my views above in terms of opportunity are based on my experience with respect to BFS CLIENTS.

__

Discl: Not invested in TechM.

Hi Donald,

@ Enterprise Segment prospects. I donât know how TechM is doing on this front, but in general for IT I can say that any company that is focussed on Infrastructure Mgmt. Services (IMS) or that derives major portion of their revenues from IMS should do very well.

Enterprise segment is a part of Infrastructure Mgmt. Services (IMS) which also includes Server Mgmt., Storage Mgmt. (storage modernisation and consolidation, disaster recovery and mgmt., backup, etc.,) along with Enterprise Networking (data center consolidation, virtualisation, cloud and mobility, etc.,).

The Savings that can be made by clients by transforming their Infrastructure landscape is huge. I see a lot of potential in this segment as clients are willing to invest/spend to transform/modernize/consolidate/manage their infrastructure as the ROIs on such investments is huge and the payback periods are very short too.

I can say the above as I work as a Business Consultant for one of big global IBs. Although Iam not a technology guy and it is not my forte, but I had to spend some time working on an assignment where I had to build a Business Case to ascertain the Savings and ROIs for such an investment/spend being made to modernize and consolidate the infrastructure (replacing the physical servers with virtual servers, consolidation of databases, etc.,) and the Savings were huge and clients are more than willing to make such investments. An IB has hundreds of big and small applications and the savings on just few applications was resulting into millions of $ saved.

Apart from the savings/cost rationalization and reduction of operational risks (very important factor for BFS clients) there are other factors like availability, performance and scalability that drive such investments/spends by clients on the IMS space.

Hence, I believe that TechM or any IT company catering to the above space has a huge scope of growth in future.

But please remember that my views above in terms of opportunity are based on my experience with respect to BFS CLIENTS.

__

Discl: Not invested in TechM.

Hello,

Is it possible for anybody to shade more light on Infrastructure Management Services offerings provided by such companies? There are two known names listed in Indian stock market (Glodyne Technoserve Ltd. and Allied Digital Services Ltd.) operating in the same space exclusively. Both of them are good example of how to lose 90% of your capital in just under a year and are now quoting for peanuts… The reason I am asking is because they were in three digits just 2 year ago and all of sudden they crashed like palace made of cards. Was it because of sudden change of wind in the overall Industries or because of mismanagement of the once fine looking business? Will it affect Tech Mahindra too sooner or later?

Thanks.

Mukund,

I believe HR is confusing Enterprise Solutions with ISM, which are different technologies altogether.

Enterprise Solutions typically refer to ERP solutions and in Mahindra Satyam’s case it means SAP implementation. Satyam has always been one of the stronger SAP players in the market. ERP implementation is a strong business worldwide and it will continue to grow over the years.

With regards to ISM, there are a lot of new technologies coming in - like NFV, SDN etc., which will typically ensure that infrastructure could be more easily managed and with lesser manpower than before - hence the decline in stock prices.

Hi Janit,

Yes you are right. I took Enterprise segment as Enterprise Networks (IMS - Infra Mgmt. Services) and not Enterprise Solutions :slight_smile:

Satyam was indeed players with respect to SAP.

Cheers!!!