Tech Mahindra: Anand Rathi Research Report

Anand Rathi are unsure of the investment prospects of Tech Mahindra and have recommended a HOLD

Tech Mahindra

Satyam discloses FY09/10 financials; low clarity

Highlights of Satyam’s financials. Satyam’s FY09 and FY10 revenues stood at Rs. 88.1bn and Rs. 54.8bn with EBITDA margin of 3.4% and 8.3% respectively. Client count of Satyam was at ~350 (from 500 before the scam; gross client addition of 44 in FY10). Details of the operating metrics and quarterly revenue run-rate of Satyam would be disclosed on 15 Nov ’10, during Satyam’s quarterly results announcement (of 1Q, 2Q).

Other details. Exceptional item for FY09 (Rs. 79.9bn) includes Rs. 62bn of prior period, while that for FY10 (Rs. 4.2bn) includes Rs. 934m owing to restructuring and right-sizing. Headcount stood at ~45,000 and 27,000 in FY09 and FY10 respectively. Cash & cash equivalents at end-FY10 stood at Rs. 21.7bn.

Merger – Still a long way away. Management stated that the merger is still 9-12 months away. Whether Tech Mahindra will be merged with Mahindra Satyam or vice versa still remains unclear. However, the merger will help offset the huge losses of Satyam against Tech Mahindra’s profits and largely reduce the tax bill. Also, it would aid the merged entity to bid for larger contracts.

Our view. We await further clarification from management of Satyam & Tech Mahindra, as regards current quarterly revenue run-rate (exit run rate), margins post wage hikes, utilisation levels and employee hiring pattern. Also, there is no clarity on Upaid and class action lawsuits. Hence, we maintain our target price & rating for Tech Mahindra.