Company Update | IT

March 21, 2012

Tech Mahindra and Mahindra Satyam

Merger announced
The Board of Directors of Tech Mahindra (Tech M) and Mahindra Satyam (Satyam) have approved the merger of both the companies along with their wholly owned subsidiaries, Venturbay Consultants Pvt. Ltd., C&S System Technologies Pvt. Ltd., CanvasM Technologies Ltd. and Mahindra Logisoft Business Solutions Ltd. The swap ratio approved by the board of both the companies is 2:17, i.e., 2 shares of Tech M (face value of `10 each) for every 17 shares of Satyam (face value of `2 each). The merger process could take up to nine months to complete and will be effective from April 1, 2011. Shareholding pattern: On a pro forma basis, Mahindra Group will own 26.3% in the combined entity, British Telecom (BT) will own 12.8%, 10.4% will be held as treasury stock, 34.4% will be held by public shareholders of Mahindra Satyam and the balance 16.1% will be held by public shareholders of Tech M. The intention of creating a treasury stock is to allow the company greater liquidity when needed. This, especially in the matter of acquisitions, is on the agenda of both the companies. Tech M will issue 10.34cr new shares, thereby increasing its outstanding shares to 23.08cr and its equity capital to `230.8cr. Well-diversified revenue mix: The combined entity will have revenue run-rate of US$2.4bn+ this size will enable the company to participate in larger deals and improve deal win rates. The combined entity will have a broader service offering. As of now, Tech Ms entire revenue comes from the telecom vertical, which has been shrinking over the past couple of years. After the merger, contribution from telecom would come down to sub-50% (47-48%). The combined entity will have a broad-based play across industries such as manufacturing, BFSI, telecom, technology, media and entertainment, retail, transport and logistics and lifesciences and healthcare. Geography wise, the revenue portfolio will be well balanced with a diversified global footprint that would boast of contribution from Americas at 42%, Europe at 35% and emerging markets at 23%. Also, Tech Ms dependence on BT, its top client, would come down considerably as the combined entity would derive ~17% of its revenue from BT, while Tech M currently derives 35% of its revenue from BT. The combined entity would have 75,000 employees, across 54 countries, and over 350 customers. Post the merger, the entity would have net cash surplus of `1,600cr-1,800cr. Outlook and valuation: The benefits of the combined entity will start being reflected only after few quarters of the mergers completion. The combined entity is expected to post a 10.7% CAGR over FY2011-13E, with growth of 8.9% yoy in FY2013. PAT of Tech M and Satyam is expected to be at `674cr and `900cr for FY2013, respectively. Considering the new share count, the consolidated EPS comes in at `68.2. We value Tech M at 11x FY2013E EPS of `68.2 (23% discount to HCL Techs target multiple of 13.5x due risks such as: 1) Tech M still generates 17% of its revenue from one client, which is high; 2) 47% of its revenue comes from the telecom vertical, which is still elevated; and 3) Tech M needs to scale up revenue from high-growth services like infrastructure management and consulting and package implementation). We maintain or Accumulate view on the stock with a target price of `750.
Please refer to important disclosures at the end of this report

ACCUMULATE
CMP Target Price
Investment Period

`684 `750
12 Months

Ankita Somani
+91 22 39357800 Ext: 6819 ankita.somani@angelbroking.com

Tech Mahindra and Mahindra Satyam | Company Update

Shareholding pattern
On a pro forma basis, Mahindra Group will own 26.3% in the combined entity, BT will own 12.8%, 10.4% will be held as treasury stock, 34.4% will be held by public shareholders of Mahindra Satyam and the balance 16.1% will be held by public shareholders of Tech M. The intention of creating a treasury stock is to allow greater liquidity to the company when needed. This, especially in the matter of acquisitions, is on the agenda of both the companies. Tech M will issue 10.34cr new shares, thereby increasing its outstanding shares to 23.08cr and its equity capital to `230.8cr.

Exhibit 1: Shareholding pattern Pre merger (%)

Shareholders Promoters Mahindra group BT Total promoter holding Others Total
Source: Company, Angel Research

Tech M 47.7 23.3 70.9 29.1 100.0

Satyam 42.7 42.7 57.4 100.0

Exhibit 2: Shareholding pattern Post merger (%)

Shareholders Mahindra group BT Treasury stock Others Existing shareholders of Tech M Existing shareholders of Satyam Total
Source: Company, Angel Research

Combined entity 26.3 12.8 10.4 50.5 34.4 16.1 100.0

Well-diversified revenue mix

The combined entity will have revenue run-rate of US$2.4bn+ this size will enable the company to participate in larger deals and improve deal win rates. The combined entity would have 75,000+ employees, across 54 countries, and over 350 customers. Vertical-wise revenue mix: The combined entity will have a broader service offering. As of now, Tech Ms entire revenue comes from the telecom vertical, which has been shrinking over the past couple of years. After the merger, contribution from telecom would come down to sub-50% (47-48%). The combined entity will have a broad-based play across industries such as manufacturing, BFSI, telecom, technology, media and entertainment (TME), retail, transport and logistics and lifesciences and healthcare.

March 21, 2012

Tech Mahindra and Mahindra Satyam | Company Update

Exhibit 3: Tech Ms revenue mix Vertical wise

4%

Exhibit 4: Satyams revenue mix Vertical wise

11% 6% 32% Manufacturing TME BFSI Retail,T&L Healthcare and life sciences 19% Others

Telecom Other

11%

96%

21%

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 5: Combined entitys revenue mix Vertical wise

3% 5% 7% Telecom Manufacturing TME 47% BFSI 10% Retail,T & L Healthcare and life sciences 17% Others

11%

Source: Company, Angel Research

Geography-wise revenue mix: The revenue mix of Tech M is skewed towards Europe (45%) because of its largest client, BT, while Satyam derives ~50% of its revenue from America. Geography wise, the revenue portfolio of the merged entity will be well balanced with a diversified global footprint that would boast of contribution from Americas at 42%, Europe at 35% and emerging markets at 23%.

Exhibit 6: Tech Ms revenue mix Geography wise

Exhibit 7: Satyams revenue mix Geography wise

22% 33% Americas Europe ROW

25% Americas 50% Europe ROW 25%

45%

Source: Company, Angel Research

Source: Company, Angel Research

March 21, 2012

Tech Mahindra and Mahindra Satyam | Company Update

Exhibit 8: Combined entitys revenue mix Geography wise

23%

42%

Americas Europe ROW

35%

Source: Company, Angel Research

Client concentration risk to come down: Tech M currently derives 35% of its revenue from its top client BT. In the merged entity, the dependence on BT would come down considerably to 17%.

Exhibit 9: Tech M Client concentration

Exhibit 10: Satyam Client concentration

11%

23% 35% Top client Top 2-5 clients 10% Top 6-10 clients Others 14% Top client 42% 16% Top 2-5 clients Top 6-10 clients Top 11-20 clients Others

32%

17%

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 11: Combined entity Client concentration

17% Top client 41% 20% Top 2-5 clients Top 6-10 clients Top 11-20 clients Others 10%

12%

Source: Company, Angel Research

March 21, 2012

Tech Mahindra and Mahindra Satyam | Company Update

Management of both the companies intends to create a single go-to-market strategy with benefits of scale and enhanced depth and breadth of capabilities, translating into increased business opportunities and reduced expenses. Management indicated that the combined entity would leverage Tech Ms expertise in mobility, system integration, delivery of large transformations and to better penetrate the opportunity presented by Mahindra Satyams diverse set of clients across multiple verticals. Similarly, Satyams expertise in enterprise solutions will enable a more complete value proposition to be delivered to Tech Ms clients. The combination will benefit from operational synergies, economies of scale, sourcing benefits, and standardization of business processes. The focus will be on account mining with the opportunity to cross-sell the services to the existing clientele.

Outlook and valuation

The synergy benefits of the combined entity will start being reflected only post few quarters of the mergers completion. From Tech M per se, we expect the non-BT business to post a CQGR of 2.4% over 3QFY2012-4QFY2013, with BTs quarterly revenue expected to be flat from here. We expect revenue CAGR of 7.6% over FY2011-13E for Tech M. For Satyam, we expect USD revenue CAGR of 13.6% over FY2011-13E. The combined entitys revenue CAGR is expected to be at 10.7% over FY2011-13E, with growth of 8.9% yoy in FY2013. PAT of Tech M and Satyam for FY2013 is expected to be at `674cr and `900cr, respectively. Considering the new share count, the consolidated EPS comes in at `68.2. If we exclude the impact of restructuring fees of `50cr, which Tech M is getting every quarter from BT, the EPS would come down to `59.7. We value Tech M at 11x FY2013E EPS of `68.2 (23% discount to HCL Techs target multiple of 13.5x due risks such as: 1) Tech M still generates 17% of its revenue from one client, which is high; 2) 47% of its revenue comes from the telecom vertical, which is still elevated; and 3) Tech M needs to scale up revenue from high-growth services like infrastructure management and consulting and package implementation). We maintain or Accumulate view on the stock with a target price of `750.

March 21, 2012

Tech Mahindra and Mahindra Satyam | Company Update

Exhibit 12: Recommendation summary

Company HCL Tech Hexaware Infosys Infotech Entp. KPIT Cummins Mahindra Satyam MindTree Mphasis NIIT^ Persistent TCS Tech Mahindra Wipro Reco. Accumulate Neutral Accumulate Accumulate Neutral Accumulate Accumulate Neutral Accumulate Neutral Accumulate Accumulate Neutral CMP (`) 484 119 2,851 148 82 78 476 421 50 317 1,172 684 427 Tgt. price (`) 520 3,047 162 87 519 55 1,262 750 Upside (%) 7.5 6.9 9.3 12.2 9.0 10.9 7.7 9.7 Target P/E (x) 13.0 11.0 18.0 10.0 10.0 11.0 10.0 11.0 6.9 9.0 19.5 11.0 15.3 FY2013 EBITDA (%) 17.5 19.0 32.0 16.9 15.4 15.4 14.7 18.3 16.3 23.0 29.9 16.3 19.7 FY2013E P/E (x) 12.1 12.8 16.9 8.7 5.0 10.1 9.5 10.7 6.2 9.1 18.1 8.4 15.4 FY2011-13E EPS CAGR (%) 22.1 79.4 18.9 16.5 19.9 35.0 42.1 0.0 19.3 0.1 20.6 28.3 13.1 FY2013E RoCE (%) 20.9 25.4 25.8 17.2 19.5 12.0 20.3 15.3 11.0 19.4 32.1 14.1 15.3 FY2013E RoE (%) 23.1 22.0 23.8 14.1 16.9 13.8 17.4 15.0 15.6 14.3 33.3 20.1 20.5

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

March 21, 2012

Tech Mahindra and Mahindra Satyam | Company Update

Research Team Tel: 022 - 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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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

Tech Mahindra 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%)

March 21, 2012

Tech Mahindra and Mahindra Satyam | Company Update

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March 21, 2012