BNP Paribas - Satyam Computers - Healthy Indicators Emerge

8/8/2019 BNP Paribas - Satyam Computers - Healthy Indicators Emerge

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TARGET INR130.00

PRIOR TP INR130.00Satyam Computers SCS INCLOSE INR98.95

BUYINDIA / SOFTWARE & SERVICES UP/DOWNSIDE +31.4% UNCHANGED

Healthy indicators emerge Marginally better revenue; higher employee count vs BNPP est.

Margins below est., but significant room for improvement.

Turnaround on track; clearer picture likely from Nov. results.

Reiterate BUY; TP unchanged.

Revenue concerns to subsideSatyam reported its restated financials forFY09 and FY10 yesterday. Revenue of

INR88.1b and INR54.8b, respectively,came in marginally ahead of ourestimates. EBITDA margins at 3.4% and8.3% were below our expectations onhigher wage costs and other operatingexpenses. With a higher-than-expectedemployee count (27,474 as of FY10,BNPP: 26,375) and revenue performance,concerns on the companys top lineshould abate. Yet we note that theseresults provide only limited insights andthe true state of business would onlyemerge with the 1Q and 2Q FY11 results (to be announced on 15

November). Despite the lower-than-expected margin performance, wesee significant scope for improvement going forward with continued focuson cost efficiencies. With an improving overall demand environment, andlikely participation in large deals made possible by the availability of therestated financials, we remain positive on the overall turnaround story,which we have stated in the past is risky, but compelling.

Key takeaways from the callAs expected, Satyam reported significant one-time expenses for FY09and FY10 (INR79.9b and INR4.2b). Satyam also highlighted the variouslegal cases it is currently involved in, which, by our calculations, couldamount to INR17-18/share in the worst case. We factor in ~INR7/share oflegal liabilities in our base case (see Exhibit 3). The company reported acash balance of ~USD480m as of FY10. Satyam reported strong client

wins (44) in FY10 alone, which our checks suggest has remained steadyover the past few quarters. In addition the company highlighted that it hadnot seen any significant price declines as a consequence of theaccounting fraud. On the likely Satyam-TECHM merger, which webelieve is a key stock re-rating event especially for TECHM, managementremained noncommittal stating that only after releasing the 1Q/2Q FY11results would the possibility be seriously reviewed.

Reiterate BUY; TP unchangedWe reiterate our BUY rating on Satyam and will take a detailed look atour estimates shortly. We acknowledge the risks that Satyam presents,but believe it continues to make for a compelling turnaround story signsof which are starting to appear. That said, we expect the local shares toremain weak until the disclosed financials are fully digested. We believe

investors could use the weakness as a good entry point for long-termpositions. Risk: Unfavourable macro environment and FX movements.

HOW WE DIFFER FROM THE STREET

BNP Consensus % Diff

Target Price (INR) 130.00 160 (18.7)

EPS 2010 (INR) 5.52 2.9 90.3

EPS 2011 (INR) 10.12 8.5 19.1

Positive Neutral Negative

Market Recs. 4 1 0

KEY STOCK DATA

YE Mar (INR m) 2010E 2011E 2012E

Revenue 54,195 60,718 71,371

Rec. net profit 6,616 12,131 14,293

Recurring EPS (INR) 5.52 10.12 11.92Prior rec. EPS (INR) 5.52 10.12 11.92

Chg. In EPS est. (%) 0.0 0.0 0.0

EPS growth (%) (29.7) 83.4 17.8

Recurring P/E (x) 17.9 9.8 8.3

Dividend yield (%) 0.0 0.0 0.0

EV/EBITDA (x) 7.1 4.6 3.4

Price/book (x) 2.0 1.7 1.4

Net debt/Equity (46.9) (56.5) (64.3)

ROE (%) 17.1 19.2 18.6

70

90

110

130

Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

(INR)

(49)

(29)

(9)

(%)Satyam Computers

Rel to MSCI India

Share price performance 1 Month 3 Month 12 Month

Absolute (%) 19.5 5.0 (20.2)

Relative to country (%) 8.5 (6.8) (41.2)

Next results November 2010

Mkt cap (USD m) 2,588

3m avg daily turnover (USD m) 33.1

Free float (%) 57

Major shareholder Tech Mahindra (43%)

12m high/low (INR) 120.40/79.15

3m historic vol. (%) 41.7

ADR ticker SAY US

ADR closing price (USD; Sept 28) 4.54

Sources : Bloomberg consensus; BNP Paribas estimates

ADR TICKER: SAY US NEW INFORMATION

RECENT COMPANY & SECTOR RESEARCH

Time for some sobriety...................................... 27 Sep 2010

Up on its feet and running..................................19 Mar 2010

More evidence of a solid FY11...........................10 Feb 2010

Abhiram Eleswarapu

+91 22 6628 [email protected]

Avinash Singh+91 22 6628 2407

[email protected]

30 September 2010PREPARED BY BNP PARIBAS SECURITIES ASIATHIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX.
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ABHIRAM ELESWARAPU SATYAM COMPUTERS 30 SEPTEMBER 2010

2 BNP PARIBAS

Exhibit 1: Actual Versus BNPP Estimates

FY09 FY10

Reported BNPP Var Reported BNPP Var

(INR m) (INR m) (%) (INR m) (INR m) (%)

Rev., USD standalone* 1,806 1,771 2.0 1,075 1,097 (2.0)

Rev., USD consol.* 1,894 1,864 1.6 1,155 1,144 1.0

Rev., INR standalone 84,062 81,942 2.6 51,005 51,997 (1.9)

EBITDA, INR standalone 3,477 12,182 4,797 9,557

% of sales 4.1 14.9 9.4 18.4

EBIT, INR standalone 505 9,558 2,889 7,027

% of sales 0.6 11.7 5.7 13.5

Rev., INR consol. 88,126 86,223 2.2 54,810 54,195 1.1

EBITDA, INR consol. 3,017 12,401 (75.7) 4,569 9,225 (50.5)

% of sales 3.4 14.4 8.3 17.0

EBIT, INR consol. (246) 9,526 2,425 6,530

% of sales (0.3) 11.0 4.4 12.0

Profit after tax, INR consol. (81,768) 5,394 (1,246) 6,616

Exceptional items 79,920 - 4,169 -

Profit after tax, INR consol.adjusted

(1,848) 5,394 2,923 6,616 (55.8)

Diluted EPS, consol. (121.49) 7.85 (1.14) 5.52

Diluted EPS, adjusted (2.75) 7.85 (135.0) 2.67 5.52 (51.5)

Employees, consol. 45,702 45,223 1.1 27,474 26,375 4.2

Revenue for FY09/10 at INR88.1b/54.8bcame in-line with our and Streets

estimates. However, EBITDA margins at3.4/8.3% were below our expectations on

higher wage costs and other operating

expenses

Note: * based on average USD/INR exchange rate for FY09 and FY10Source: Satyam Computers; BNP Paribas estimates

Exhibit 2: News Flow On Satyam Past And Likely Future

- More small deal

wins

- Wage hikes to

stem attrition- Virtual pool

programme ends

- More cost

rationalization

- More small deal

wins from existing

clients

- Likely increasedfresher hiring

- Release of FY09 and

FY10 financials

- Financials to allow

company to bid for newprojects

- Market hiring and likely

new deal wins

Mar-10 Jun-10 Sep-10 Dec-10

- Start of quarterly

financial reporting

- Potential merger plans

with Tech Mahindra- Likely P/E re-rating of

both SCS and TECHM

stocks

We believe the merged entity shouldretain the Satyam brand name,

irrespective of how the merger is

structured, based on the publicity theMahindra Satyam brand got from the

FIFA World Cup and other mediacoverage

Source: BNP Paribas

Exhibit 3: Summary of Likely Claims and Damages Comments by the Company and their Impact on our TP

(USD m) Claims Comments/update

Satyam BNPP est. Satyam BNPP estimates in the base case

Unacknowledgedclaims by 37companies

~270 75 Classified as 'Amounts Pending InvestigationSuspense Account (Net)' under liabilities in the

B/S for the entire amount of INR12304m

We factor in 30% of those in our base case.

Upaid case 70 70 Company has deposited the amount in anescrow account subject to the settlement

Case recently settled out-of-court for USD70m with a furtherruling in favour of Satyam with no additional tax liabilities.

US class actionlawsuits

>68 22 The company is contesting the lawsuits and isyet to determine the actual impact

Assuming 3% settlement in our base case, on approximatelyUSD723m of disclosure dollar loss (DDL) ADR holders might

have faced since the companys intention to acquire the Maytasbusinesses*.

Additional write-offs,etc

~125 24 The company is contesting various income taxrelated claims to the tune of INR5,575m

We factor in ~USD24m of such claims and write-offs in additionto the liabilities likely arising out of the above mentioned claims

Total (USD m) ~460 191

Total (INR m) 20,939 8,595

Amount per share 17 7

* According to a study conducted by Cornerstone Research on corporate frauds in the US, the median settlement as a percentage of DDLs over USD500m for 2002-2007 was 2.4% (samplesize=155) and 2.1% (sample size=17) in 2008.Source: Satyam Computers; BNP Paribas estimates


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4 BNP PARIBAS

Base Best Worst

FY11E FY11E FY11E FY11E FY12E

USD/INR period end 45.75 45.75 48.50 50.32 43.50 41.18

EPS (INR) 10.12 11.92 12.21 16.08 8.41 7.78

Change (%) 20.6 34.9 (16.9) (34.8)

Key Earnings Drivers & Sensitivity The key macro factor that can impact Satyams earnings is

currency fluctuation, specifically the USD/INR rate.

In our best and worst cases, we assume the FY12 average

USD/INR rate changes by 10% versus our base case. We

calculate that, all else staying the same, this could cause a

35% variation to our base case FY12 EPS.

Sources: BNP Paribas estimates

Satyam Computers and BSE Sensex 30 Index (3M and 6M

Realised-Vol)

Regression Satyam Computers Rel to BSE Sensex 30

Index

0

50

100

150

200

250

300

350

400

Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

(%)

Sa ty am C om pu te rs - 3 M R ea li se d - Vo l S atya m Co mp uters - 6M Re alis ed - V ol

BSE Sensex 30 Index - 3M Rea li sed - Vo l BSE Sensex 30 Index - 6M Real ised - Vo l

Sources: Bloomberg; BNP Paribas

22

122

222

322

422

522

7225 9225 11225 13225 15225 17225 19225 21225BSE Sensex 30 Index

SatyamComputers

Satyam Computers = 322 + 0 * SENSEX Index

R Square = 0.0017

Regression based on 261 observations of 5 years weekly data. Pl ease refer to Appendix 1 for the

explanation of R-square

Sources: Bloomberg; BNP Paribas

India Sector Correlation Matrix at 15 July 2010

India

Autos

India

Banks

India

Engineering

& Construct

India

Software &

Services

India

Metals &

Mining

India Oil &

Gas

India

Property

India

Telcos

India

Utilities

India Autos 1.000 0.688 0.701 0.569 0.724 0.672 0.630 0.599 0.688

India Banks 1.000 0.838 0.582 0.713 0.733 0.747 0.683 0.781

India Engineering & Construct 1.000 0.593 0.739 0.756 0.785 0.711 0.792

India Software & Services 1.000 0.555 0.584 0.452 0.500 0.563

India Metals & Mining 1.000 0.768 0.716 0.642 0.744

India Oil & Gas 1.000 0.656 0.671 0.787

India Property 1.000 0.672 0.733

India Telcos 1.000 0.733

India Utilities 1.000

Source: BNP Paribas Sector Strategy

Long/Short Chart The Risk Experts

Satyam Computers - Tech Mahindra

-2s

-1s

Mean

+1s

+2s

-0.19

0.01

0.21

0.41

0.61

0.81

1.01

Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10

(x)

The Risk Experts Our starting point for this page is a recognition of the

macro factors that can have a significant impact on stock-

price performance, sometimes independently of bottom-up

factors.

With our Risk Expert page, we identify the key macro risks

that can impact stock performance.

This analysis enhances the fundamental work laid out in

the rest of this report, giving investors yet another resource

to use in their decision-making process.

Sources: BNP Paribas estimates


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5 BNP PARIBAS

F I N A N C I A L S T A T E M E N T S

Satyam Computers

Profit and Loss (INR m)Year Ending Mar 2008A 2009A 2010E 2011E 2012E

Revenue 86,223 54,195 60,718 71,371

Cost of sales ex depreciation (58,778) (36,827) (35,794) (43,916)Gross profit ex depreciation 27,445 17,368 24,923 27,455Other operating income 0 0 0 0Operating costs (15,043) (8,144) (9,391) (10,274)Operating EBITDA 12,401 9,225 15,532 17,180Depreciation (2,875) (2,694) (2,576) (2,617)Goodwill amortisation 0 0 0 0Operating EBIT 9,526 6,530 12,956 14,563Net financing costs (610) (488) (300) (135)Associates 0 0 0 0Recurring non operating income (2,748) 2,149 2,442 3,539Non recurring items 0 0 0 0Profit before tax 6,168 8,192 15,099 17,967Tax (774) (1,576) (2,968) (3,674)Profit after tax 5,394 6,616 12,131 14,293Minority interests 0 0 0 0

Preferred dividends 0 0 0 0Other items 0 0 0 0Reported net profit 5,394 6,616 12,131 14,293Non recurring items & goodwill (net) 0 0 0 0Recurring net profit 5,394 6,616 12,131 14,293

Per share (INR)

Recurring EPS * 7.85 5.52 10.12 11.92Reported EPS 8.00 5.63 10.32 12.16DPS 0.00 0.00 0.00 0.00

Growth

Revenue (%) na (37.1) 12.0 17.5Operating EBITDA (%) na (25.6) 68.4 10.6Operating EBIT (%) na (31.4) 98.4 12.4Recurring EPS (%) na (29.7) 83.4 17.8

Reported EPS (%) na (29.7) 83.4 17.8Operating performance

Gross margin inc depreciation (%) 28.5 27.1 36.8 34.8Operating EBITDA margin (%) 14.4 17.0 25.6 24.1Operating EBIT margin (%) 11.0 12.0 21.3 20.4Net margin (%) 6.3 12.2 20.0 20.0Effective tax rate (%) 12.6 19.2 19.7 20.5Dividend payout on recurring profit (%) 0.0 0.0 0.0 0.0Interest cover (x) 11.1 17.8 51.4 133.9Inventory days na 0.0 0.0 0.0Debtor days na 100.7 80.4 81.4Creditor days na 132.2 82.5 83.4Operating ROIC (%) na 21.9 38.4 43.3Operating ROIC WACC (%) na 3.3 19.8 24.7ROIC (%) na 20.9 33.8 39.9

ROIC WACC (%) na 2.3 15.2 21.3ROE (%) na 17.1 19.2 18.6ROA (%) na 11.8 16.2 16.0* Pre exceptional, pre-goodwill and fully diluted

Note : FY10 numbers are BNPP estimates as we await the cash flow detailsSources: Satyam Computers; BNP Paribas estimates

Expect FY11 revenuegrowth close to theindustry average afteroperational stability isrestored

Modelling EBIT marginsto expand on cost-cuttinginitiatives and employeerationalization


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6 BNP PARIBAS

Satyam Computers

Cash Flow (INR m)Year Ending Mar 2008A 2009A 2010E 2011E 2012E

Recurring net profit 5,394 6,616 12,131 14,293Depreciation 2,875 2,694 2,576 2,617Associates & minorities 0 0 0 0

Other non-cash items 0 (1,249) (2,803) (3,674)Recurring cash flow 8,269 8,061 11,904 13,235Change in working capital 0 (6,410) (910) (289)Capex - maintenance 0 (1,300) (1,579) (1,998)Capex new investment 0 0 0 0Free cash flow to equity 8,269 351 9,415 10,949Net acquisitions & disposals 0 0 0 0Dividends paid 0 0 0 0Non recurring cash flows 0 0 0 0Net cash flow 8,269 351 9,415 10,949Equity finance 0 29,083 0 0Debt finance 0 (3,327) (1,164) (2,530)Movement in cash 8,269 26,107 8,250 8,419

Per share (INR)

Recurring cash flow per share 12.27 6.86 10.13 11.26FCF to equity per share 12.27 0.30 8.01 9.31

Balance Sheet (INR m)Year Ending Mar 2008A 2009A 2010E 2011E 2012EWorking capital assets 22,791 17,120 19,617 22,221Working capital liabilities (19,376) (7,295) (8,882) (11,197)Net working capital 3,415 9,825 10,735 11,024Tangible fixed assets 13,746 12,516 11,658 11,178Operating invested capital 17,161 22,341 22,393 22,202Goodwill 0 0 0 0Other intangible assets 0 0 0 0Investments 6,818 6,818 6,818 6,818Other assets 1,000 1,000 1,000 1,000Invested capital 24,978 30,158 30,211 30,019Cash & equivalents (3,730) (31,813) (43,413) (55,772)Short term debt 0 0 0 0Long term debt * 8,220 5,220 4,220 1,690

Net debt 4,490 (26,593) (39,193) (54,082)Deferred tax 0 0 0 0Other liabilities 0 0 0 0Total equity 20,488 56,751 69,404 84,101Minority interests 0 0 0 0Invested capital 24,978 30,158 30,211 30,019* includes convertibles and preferred stock which is being treated as debt

Per share (INR)

Book value per share 30.40 48.28 59.04 71.55Tangible book value per share 30.40 48.28 59.04 71.55

Financial strength

Net debt/equity (%) 21.9 (46.9) (56.5) (64.3)Net debt/total assets (%) 9.3 (38.4) (47.5) (55.8)Current ratio (x) 1.4 6.7 7.1 7.0CF interest cover (x) 14.6 1.7 32.4 82.0

Valuation 2008A 2009A 2010E 2011E 2012ERecurring P/E (x) * 12.6 17.9 9.8 8.3Recurring P/E @ target price (x) * 16.6 23.6 12.8 10.9Reported P/E (x) 12.4 17.6 9.6 8.1Dividend yield (%) 0.0 0.0 0.0 0.0P/CF (x) 8.1 14.4 9.8 8.8P/FCF (x) 8.1 331.4 12.4 10.6Price/book (x) 3.3 2.0 1.7 1.4Price/tangible book (x) 3.3 2.0 1.7 1.4EV/EBITDA (x) ** 7.1 7.1 4.6 3.4EV/EBITDA @ target price (x) ** 9.3 9.6 6.7 5.1EV/invested capital (x) 2.8 3.0 2.6 2.1* Pre exceptional, pre-goodwill and fully diluted** EBITDA includes associate income and recurring non-operating income

Note : FY10 numbers are BNPP estimates as we await the cash flow detailsSources: Satyam Computers; BNP Paribas estimates

Cash infusion ofUSD600m from TechMahindras purchase of a42.7% stake in Satyam


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7 BNP PARIBAS

H I S T O R Y O F C H A N G E I N I N V E S T M E N T R A T I N G A N D / O R T A R G E T P R I C E

Satyam Computer Services (SCS IN)

18.00

118.00

218.00

318.00

418.00

518.00

618.00

Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

(INR) Satyam Computers Target Price

Date Reco TP

13-May-08 BUY 570.00

26-Nov-08 HOLD 250.00

18-Dec-08 REDUCE 138.00

1-Sep-09 BUY 140.00

Abhiram Eleswarapu started covering this stock from 12 May 2008Price and TP are in local currency

Valuation and risks: Main risks to our DCF-based TP are unexpected demand weakness and adverse forex movements.

Sources: Bloomberg, BNP Paribas


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8 BNP PARIBAS

D I S C L A I M E R S & D I S C L O S U R E S

ANALYST(S)

Abhiram Eleswarapu, BNP Paribas Securities India Pvt Ltd, +91 22 6628 2406,

[email protected].

Avinash Singh, BNP Paribas Securities India Pvt Ltd, +91 22 6628 2407, [email protected] report was produced by a member company of the BNP Paribas Group (Group)

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The information contained in this report has been obtained from public sources believed to be reliable and the opinions contained herein areexpressions of belief based on such information. No representation or warranty, express or implied, is made that such information or opinions isaccurate, complete or verified and it should not be relied upon as such. This report does not constitute a prospectus or other offering document oran offer or solicitation to buy or sell any securities or other investments. Information and opinions contained in this report are published for referenceof the recipients and are not to be relied upon as authoritative or without the recipients own independent verification or taken in substitution for theexercise of judgement by the recipient. All opinions contained herein constitute the views of the analyst(s) named in this report, they are subject tochange without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in thisreport. Any reference to past performance should not be taken as an indication of future performance. No member company of the Group acceptsany liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report.

The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) withregard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is,or will be, directly or indirectly, related to the specific recommendation or views expressed herein.

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Disclosure and Analyst Certi f ication

For a complete set of required disclosures relating to the companies that are the subject of this report, please mail a request to BNP ParibasCompliance Department, 787 Seventh Avenue, New York, NY 10019.

BNP Paribas represents that:

Within the next three months, BNPP or its affiliates may receive or seek compensation in connection with an investment banking relationship withone or more of the companies referenced herein.

The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) withregard to any and all of the subject securities and companies mentioned in this report; (ii) no part of the compensation of the analyst(s) was, is, orwill be, directly or indirectly, relate to the specific recommendation or views expressed herein; and (iii) BNPP is not aware of any other actual ormaterial conflicts of interest concerning any of the subject securities and companies referenced herein as of the time of publication of the researchreport.

A detailed discussion of the valuation methodologies used to derive our target prices and the risks that could impede their achievement for stocksrecommended in the report is available on request from the analyst(s) named in this report.

Recommendation structureAll share prices are as at market close on 29 September 2010 unless otherwise stated. Stock recommendations are based on absolute upside(downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If thedownside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation isHOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE callsand are limited to at most five key buys and five key sells in each market at any point in time.

Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause atemporary mismatch between upside/downside for a stock based on market price and the formal recommendation.

*In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the marketwill reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases,therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.

Rating distribution (as at 27 September 2010)Out of 489 rated stocks in the BNP Paribas coverage universe, 304 have BUY ratings, 136 are rated HOLD and 50 are rated REDUCE. Withinthese rating categories, 4.61% of the BUY-rated companies either currently are or have been BNP Paribas clients in the past 12 months, 4.41% ofthe HOLD-rated companies are or have been clients in the past 12 months, and 10% of the REDUCE-rated companies are or have been clients inthe past 12 months

Should you require additional information please contact the relevant BNP Paribas research team or the author(s) of this report.

2010 BNP Paribas Group

BNP Paribas - Satyam Computers - Healthy Indicators Emerge

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