3QFY2012 Result Update | IT

February 1, 2012

Mahindra Satyam
Performance highlights
Y/E March (` cr) Net revenue EBITDA EBITDA margin (%) Adj. PAT* 3QFY12 1,718 278 16.2 308 2QFY12 1,578 242 15.3 238 % chg (qoq) 8.9 15.1 87bp 29.5 3QFY11 1,279 82 6.4 112 % chg (yoy) 34.3 239.5 978bp 174.9

ACCUMULATE
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code IT 8,975 0.9 94/54 1,648,614 2 17,301 5,236 SATY.BO SCS@IN

`76 `87
12 Months

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

Mahindra Satyam (Satyam) reported its 3QFY2012 results, which were in-line with our expectations on the revenue front, but were higher than ours as well as streets expectations on the operating as well as bottom-line fronts. The company is back on its growth track after two years of metamorphosis undertaken by Tech Mahindras management post its acquisition in June 2009. We continue to maintain our Accumulate rating on the stock. Quarterly highlights: For 3QFY2012, Satyam reported revenue of US$325mn, down 1.6% qoq. The companys USD revenue was impacted by 1.4% qoq due to unfavorable cross-currency movement growth of 3.1% qoq to US$330mn, led by volume growth. In INR terms, revenue came in at `1,718cr, up 8.9% qoq. The companys EBITDA and EBIT margin increased by 87bp and 113bp qoq to 16.2% and 13.9%, respectively, despite giving wage hikes during the quarter because of steep INR depreciation. PAT came in at `308cr, up 29.5% qoq, aided by forex gain of `66cr, which led to other income of `151cr in 3QFY2012 vs. `97cr in 2QFY2012. Outlook and valuation: The company expects its EBS service segment and manufacturing vertical to bolster growth and help it to track the industrys growth rate. This is coherent with the demand color given by the managements of most other tier-I companies as well. We expect the companys core competence in EBS to supplement growth and post a 13.6% and 19.0% CAGR in USD and INR revenue, respectively, over FY2011-13E. On the EBITDA and PAT front, the company is expected to post 59.9% and 38.5% CAGR over FY2011-13E. At the CMP of `76, the stock is trading at a 9.5x FY2013 EPS of `8.0. We value the stock at 40% discount to Infosys target FY2013 PE i.e., 10.8x and continue to maintain our Accumulate rating on the stock with a target price of `87. Key financials (Consolidated, Indian GAAP)
Y/E March (` cr) Net sales % chg Net profit* % chg EBITDA margin (%) EPS (`)* P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) FY2010
5,481 (37.8) 292 (258.2) 8.3 2.5 30.5 1.9 6.3 4.1 1.2 14.9

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 42.7 4.2 17.1 36.1

Abs. (%) Sensex Mahindra Satyam

3m (1.0) 8.5

1yr (4.0) 29.5

3yr 90.8 32.4

FY2011
5,145 (6.1) 494 68.9 8.8 4.2 18.1 1.9 10.7 4.6 1.2 13.7

FY2012E
6,423 24.8 997 102.0 15.5 8.5 9.0 1.6 17.7 12.1 1.0 6.8

FY2013E
7,288 13.5 947 (5.1) 16.0 8.0 9.5 1.4 14.4 12.6 0.8 5.2

Ankita Somani
+91 22 39387800 Ext: 6819 ankita.somani@angelbroking.com

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

Please refer to important disclosures at the end of this report

Mahindra Satyam | 3QFY2012 Result Update

Exhibit 1: 3QFY2012 performance (Consolidated, Indian GAAP)

Y/E March (` cr) Net revenue Direct costs Gross profit SG&A expenses EBITDA Dep. and amortization EBIT Interest charges Other income PBT Tax PAT Exceptional item Minority interest Final PAT Adj. PAT* EPS* (`) Gross margin (%) EBITDA margin (%) EBIT margin (%) PAT margin (%) 3QFY12 1,718 1,046 672 394 278 39 240 3 151 388 79 309 1 308 308 2.6 39.1 16.2 13.9 16.5 2QFY12 1,578 962 616 374 242 40 202 2 97 297 58 239 1 238 238 2.0 39.0 15.3 12.8 14.2 (1.4) 29.5 29.5 29.4 8bp 87bp 113bp 227bp 30.8 36.6 29.4 % chg (qoq) 8.9 8.8 9.1 5.3 15.1 (2.8) 18.5 32.4 3QFY11 1,279 909 370 289 82 38 44 2 87 129 16 113 53 1 59 112 1.0 29.0 6.4 3.4 8.2 423.7 174.9 174.9 1015bp 978bp 1052bp 829bp 201.4 396.9 173.8 % chg (yoy) 34.3 15.1 81.4 36.5 239.5 1.1 447.0 17.4 9MFY12 4,730 2,938 1,791 1,059 732 116 616 9 346 953 179 774 2 772 772 6.6 37.9 15.5 13.0 15.2 9MFY11 3,770 2,690 1,080 803 277 140 136 7 192 321 69 252 70 2 180 249 2.1 28.6 7.3 3.6 6.3 (14.8) 329.5 209.6 209.7 924bp 814bp 941bp 891bp 197.1 158.9 207.6 % chg (yoy) 25.5 9.2 65.9 31.9 164.6 (17.3) 351.8 27.0

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

Exhibit 2: Actual vs. Angel estimates

(` cr) Net revenue EBITDA margin (%) PAT
Source: Company, Angel Research

Actual 1,718 16.2 308

Estimate 1,716 14.9 190

% Var. 0.1 132bp 62.4

INR depreciation steals the show

For 3QFY2012, Satyam reported revenue of US$325mn, down 1.6% qoq. USD revenue was impacted by 1.4% qoq due to unfavorable cross-currency movement derived due to USD appreciation qoq as against the GBP, Euro and AUD, respectively. In INR terms, revenue came in at `1,718cr, up 8.9% qoq, largely led by higher USD/INR rate realized of `52.9 vis--vis ~`51.5 realized by other Indian IT players.

February 1, 201

Mahindra Satyam | 3QFY2012 Result Update

Exhibit 3: Trend in revenue growth (qoq)

340 330 320 4.4 320 3.2 304 5.3 7.0 330 8 6 325 4

(US$ mn)

310 300 290 280 270 260 3QFY11 4QFY11 284

0 (1.6) (2) (4) 1QFY12 2QFY12

qoq growth (%)

3QFY12

Revenue (US$mn)

Source: Company, Angel Research

Industry wise, growth was again led by the BFSI segment, revenue of which grew by 8.8% qoq, respectively. However, rest all the industry segments reported a qoq decline in their revenue due to delays in decision making by clients. Revenue of the manufacturing and retail and logistics segments declined slightly by 1.6% qoq each, however revenue of the technology, media and telecom (TME) and healthcare and lifesciences segments declined considerably by 10.9% and 15.6% qoq, respectively.

Exhibit 4: Growth in industry segments

Particulars Manufacturing TME (includes telecom also) BFSI Retail and logistics Healthcare and lifesciences Others
Source: Company, Angel Research

% to revenue 32.0 19.0 21.0 11.0 6.0 11.0

% growth (qoq) (1.6) (10.9) 8.8 (1.6) (15.6) 8.3

Geography wise, growth was led by Europe, revenue from which grew by 2.5% qoq. However, revenue from U.S. declined by 5.4% qoq. Revenue from emerging markets (RoW), which reported a 4.8% qoq decline in 2QFY2012, posted a 2.5% qoq increase in 3QFY2012.

Exhibit 5: Growth trend in geographies

Particulars Americas Europe RoW
Source: Company, Angel Research

% to revenue 50.0 25.0 25.0

% growth (qoq) (5.4) 2.5 2.5

February 1, 201

(%)

Mahindra Satyam | 3QFY2012 Result Update

Subdued hiring
During the quarter, the company added merely 188 net employees, taking its total employee base to 32,280. Attrition rate of the company stood flat qoq at 16.0%. Going ahead, management indicated that it will remain cautious on fresher hiring and will wait for signs from the macroeconomic environment for further hiring plans.

Exhibit 6: Employee metrics

Particulars Net employee addition Total employees Attrition (%)
Source: Company, Angel Research

3QFY11 764 28,832 25

4QFY11 434 29,266 22

1QFY12 2,172 31,438 17

2QFY12 654 32,092 16

3QFY12 188 32,280 16

Margin enhances
During the quarter, the companys EBITDA and EBIT margin increased by 87bp and 113bp qoq to 16.2% and 13.9%, respectively, despite giving wage hikes during the quarter (12.5% for offshore employees and 2.5% for onsite employees effective from October 2011). This was because of steep INR depreciation and lower operating and administration expenses.

Exhibit 7: Margin profile

45 40 35 30 25 20 15 10 5 0 6.4 3.4 3QFY11 9.7 4QFY11 13.0 14.8 12.2 15.3 12.8 16.2 13.9 29.0 34.3 35.1 39.0 39.1

(%)

1QFY12
EBITDA margin

2QFY12
EBIT margin

3QFY12

Gross margin

Source: Company, Angel Research

Client pyramid
Client pyramid of the company did not show any quality improvement, with few clients from higher revenue brackets moving down to lower revenue brackets. Three clients moved from the US$10mn-20mn bracket, of which two clients were added in the US$20mn50mn bracket and one in the US$5mn20mn revenue bracket.

February 1, 201

Mahindra Satyam | 3QFY2012 Result Update

Exhibit 8: Client metrics

Particulars Total active clients US$1mn5mn US$5mn10mn US$10mn20mn US$20mn50mn US$50mn+
Source: Company, Angel Research

3QFY11 217 76 14 21 7 3

4QFY11 230 96 15 21 9 3

1QFY12 220 83 11 22 11 3

2QFY12 228 77 12 19 13 3

3QFY12 217 79 16 14 13 3

Outlook and valuations

The new management has proved its ability of turning around the company in two years time by putting it back to comparable industry level growth and improving margins from 3% in FY2010 to 16.2% in 3QFY2012. Satyam has enterprise business solutions (EBS) (~40% of its revenue) and manufacturing (~32% of its revenue) showing strong traction. The company expects this service and vertical, respectively, to bolster growth and help it to track the industrys growth rate. This is coherent with the demand color given by the managements of most other tier-I companies as well. We expect the companys core competence in EBS to supplement growth and post a 13.6% and 19.0% CAGR in USD and INR revenue, respectively, over FY2011-13E. On the operating front, Satyam scaled up its margins from 8.8% in FY2011 to 16.2% in 3QFY2012 on the back of factors such as INR depreciation and rationalization of employee pyramid (no. of employees < 3 years are now at 28% vs. 24% in FY2011). Most of the impact of INR deprecation has already flown in the companys margins in 3QFY2012. Management indicated that the company will resort to just-in-time hiring in the near term, which will help the company improve its utilization level from the current 75% to 77% in FY2013, thereby providing a cushion to its margin in FY2013. On the EBITDA and PAT fronts, the company is expected to post a 59.9% and 38.5% CAGR over FY2011-13E. At the CMP of `76, the stock is trading at 9.5x FY2013 EPS of `8.0. We value the stock at 40% discount to Infosys target FY2013 PE i.e., 10.8x and continue to maintain our Accumulate rating on the stock with a target price of `87.

Exhibit 9: Key assumptions

Particulars Revenue growth - USD terms (%) Revenue growth - INR terms (%) EBITDA margin (%) EBIT margin (%) Tax rate (%) EPS growth (%)
Source: Company, Angel Research

FY2012 15.4 24.8 15.5 13.0 18.6 -

FY2013 11.8 13.5 16.0 13.6 22.0 (5.2)

February 1, 201

Mahindra Satyam | 3QFY2012 Result Update

Exhibit 10: Change in estimates

FY2012E Parameter (` cr) Net revenue EBITDA PBT Tax PAT Earlier estimates 6,477 979 1,053 188 862 Revised estimates 6,423 994 1,229 229 997 Variation (%) (0.8) 1.5 16.7 21.7 15.7 Earlier estimates 7,365 1,089 1,119 242 874 FY2013E Revised estimates 7,288 1,163 1,216 268 947 Variation (%) (1.0) 6.8 8.7 10.4 8.3

Source: Company, Angel Research

Exhibit 11: One-year forward PE(x) chart

180 160 140 120 100 80 60 40 20 0 Apr-09 Sep-09 Price
Source: Company, Angel Research

(`)

Feb-10 20x

Jul-10 17x

Dec-10 14x

May-11 11x

Oct-11 8x

Exhibit 12: Recommendation summary

Company HCL Tech Hexaware Infosys Infotech Enterprises KPIT Cummins Mahindra Satyam Reco. Buy Accumulate Accumulate Neutral Accumulate Accumulate Buy Neutral Buy Neutral Accumulate Neutral Neutral CMP (`) 438 88 2,735 133 149 76 434 375 42 327 1,128 655 412 Tgt. price (`) 520 96 3,047 163 87 502 55 1,262 Upside (%) 18.7 9.3 11.4 9.3 14.1 15.7 30.5 11.9 Target P/E (x) 13.0 11.0 18.0 8.5 10.0 10.8 10.0 11.5 6.9 9.5 19.5 9.0 15.3 FY2013 EBITDAM (%) 17.5 18.7 32.0 16.0 15.4 16.0 14.7 16.6 16.3 23.0 29.9 16.8 19.7 FY2013E P/E (x) 11.0 10.1 16.2 8.4 9.1 9.5 8.6 10.2 5.3 9.3 17.4 7.9 14.8 FY2011-13E EPS CAGR (%) 22.1 74.1 18.9 11.9 19.9 38.4 42.1 (3.1) 19.3 0.1 20.6 29.9 13.1 FY2013E RoCE (%) 20.9 21.4 25.8 16.1 19.5 12.6 20.3 14.0 11.0 19.4 32.1 14.6 15.3 FY2013E RoE (%) 23.1 19.8 23.8 13.0 16.9 14.4 17.4 14.2 15.6 14.3 33.3 20.0 20.5

MindTree Mphasis NIIT^

Persistent

TCS
Tech Mahindra

Wipro

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

February 1, 201

Mahindra Satyam | 3QFY2012 Result Update

Profit and loss statement (Consolidated, Indian GAAP)

Y/E March (` cr) Net revenues Employee costs Gross profit % to net sales SG&A expenses % to net sales EBITDA % to net sales Dep. and amortisation % to net sales EBIT % to net sales Interest charges Other income PBT Tax % of PBT PAT Exceptional item Minority interest Final PAT Adj. PAT* EPS (`)* Note: * excluding exceptional item FY2010 5,481 3,981 1,500 27.4 1,043 19.0 457 8.3 214 3.9 243 4.4 33 106 315 22 7.0 293 417 1 (125) 292 2.5 FY2011 5,145 3,594 1,551 30.1 1,096 21.3 455 8.8 185 3.6 270 5.3 10 294 555 58 10.4 497 641 3 (147) 494 4.2 FY2012E 6,423 3,995 2,428 37.8 1,435 22.3 994 15.5 157 2.4 837 13.0 12 404 1,229 229 18.6 1,000 3 997 997 8.5 FY2013E 7,288 4,535 2,753 37.8 1,590 21.8 1,163 16.0 175 2.4 988 13.6 17 245 1,216 268 22.0 949 2 947 947 8.0

February 1, 201

Mahindra Satyam | 3QFY2012 Result Update

Balance sheet (Consolidated, Indian GAAP)

Y/E March (` cr) Liabilities Share capital Share app. money pending allotment Reserves and surplus Total shareholders' funds Minority interest Loan funds Deferred tax liability Sub-total Amount pending investigation suspense acc. Total capital employed Assets Fixed assets Investments Deferred tax asset Current assets, loans and advances Inventories Sundry debtors Cash and bank balances Other current assets Loans and advances Less: Current liabilities and provisions Liabilities Provisions Net current assets Profit and loss account Sub-total Unexplained differences suspense account (net) Total capital deployed 882 1,540 1,558 2,749 5,927 5,927 1,546 1,558 1,624 2,896 5,913 5,913 1,182 1,638 1,903 3,500 6,907 6,907 1,342 1,822 2,488 3,753 7,854 7,854 923 2,177 496 385 59 1,159 2,754 379 378 55 1,425 2,264 381 597 55 1,617 2,887 371 722 987 627 7 950 435 8 1,118 377 8 1,123 481 8 235 0 4,395 4,630 20 42 4 4,696 1,230 5,927 235 4,386 4,621 23 32 7 4,683 1,230 5,913 235 5,383 5,619 23 28 7 5,677 1,230 6,907 235 6,330 6,565 23 28 7 6,623 1,230 7,854 FY2010 FY2011 FY2012E FY2013E

February 1, 201

Mahindra Satyam | 3QFY2012 Result Update

Cash flow statement (Consolidated, Indian GAAP)

Y/E March (` cr) Pre tax profit from operations Depreciation Pre tax cash from operations Other income/prior period ad Net cash from operations Tax Cash profits (Inc)/dec in current assets Inc/(dec) in current liabilities Net trade working capital Cash flow from operating activities (Inc)/dec in fixed assets (Inc)/dec in investments (Inc)/dec in deferred tax (Inc)/dec in other non current assets Inc/(dec) in minority interest Cash flow from investing activities Inc/(dec) in debt Inc/(dec) in equity/premium Dividends Cash flow from financing activities Cash generated/(utilised) Cash at start of the year Cash at end of the year FY2010 210 214 424 106 530 22 507 507 (445) 62 569 38 (627) (1) (125) 1 (714) (772) 2,593 1,821 1,676 501 2,177 FY2011 261 185 445 294 740 58 679 (172) 682 510 1,189 (148) 192 1 (147) 3 (99) (11) (503) (513) 577 2,177 2,754 FY2012E 824 157 981 404 1,386 229 1,154 (484) (285) (768) 386 (325) 57 0 (604) (872) (4) (4) (489) 2,754 2,265 FY2013E 971 175 1,146 245 1,391 268 1,121 (306) 344 38 1,160 (180) (104) (253) (537) 623 2,264 2,887

February 1, 201

Mahindra Satyam | 3QFY2012 Result Update

Key ratios
Y/E March Valuation ratio (x) P/E (on FDEPS) P/CEPS P/BVPS Dividend yield (%) EV/Sales EV/EBITDA EV/Total assets Per share data (`) EPS Cash EPS Dividend Book value Dupont analysis Tax retention ratio (PAT/PBT) Cost of debt (PBT/EBIT) EBIT margin (EBIT/Sales) Asset turnover ratio (Sales/Assets) Leverage ratio (Assets/Equity) Operating ROE Return ratios (%) RoCE (pre-tax) Angel RoIC RoE Turnover ratios (x) Asset turnover (fixed assets) Receivables days Payable days FY2010 FY2011 FY2012E FY2013E

30.5 99.8 1.9 1.2 14.9 1.2 2.5 0.8 39.4 0.9 1.3 0.0 0.9 1.3 6.3 4.1 6.5 6.3 5.6 61 81

18.1 239.6 1.9 1.2 13.7 1.1 4.2 0.3 39.3 0.9 2.1 0.1 0.9 1.3 10.8 4.6 8.6 10.7 5.4 82 157

9.0 7.8 1.6 1.0 6.8 1.0 8.5 9.8 47.8 0.8 1.5 0.1 0.9 1.2 17.8 12.1 18.0 17.7 5.7 81 108

9.5 8.0 1.4 0.8 5.2 0.8 8.0 9.5 55.9 0.8 1.2 0.1 0.9 1.2 14.5 12.6 19.9 14.4 6.5 81 108

February 1, 201

10

Mahindra Satyam | 3QFY2012 Result Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroing.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

Mahindra Satyam No No No No

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

Ratings (Returns):

Buy (> 15%) Reduce (-5% to 15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

February 1, 201

11