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Tech-Mahindra Satyam Merger Update

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					                                                                                                         Company Update | IT
                                                                                                                   March 21, 2012



 Tech Mahindra and Mahindra Satyam                                                      ACCUMULATE
                                                                                        CMP                               `684
 Merger announced                                                                       Target Price                      `750
 The Board of Directors of Tech Mahindra (Tech M) and Mahindra Satyam                   Investment Period            12 Months
 (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 M’s 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 M’s 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 merger’s 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 Tech’s 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       Ankita Somani
 and package implementation). We maintain or Accumulate view on the stock with         +91 22 39357800 Ext: 6819
 a target price of `750.                                                               ankita.somani@angelbroking.com


Please refer to important disclosures at the end of this report                                                               1
                                  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                                                Tech M           Satyam
                 Promoters
                   Mahindra group                                              47.7             42.7
                   BT                                                          23.3
                 Total promoter holding                                        70.9             42.7
                 Others                                                        29.1             57.4
                 Total                                                        100.0            100.0
                 Source: Company, Angel Research



                 Exhibit 2: Shareholding pattern – Post merger (%)
                 Shareholders                                                         Combined entity
                 Mahindra group                                                                 26.3
                 BT                                                                             12.8
                 Treasury stock                                                                 10.4
                 Others                                                                         50.5
                   Existing shareholders of Tech M                                              34.4
                   Existing shareholders of Satyam                                              16.1
                 Total                                                                         100.0
                 Source: Company, Angel Research


                 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 M’s 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                                                                                      2
                                                             Tech Mahindra and Mahindra Satyam | Company Update



Exhibit 3: Tech M’s revenue mix – Vertical wise                  Exhibit 4: Satyam’s revenue mix – Vertical wise

                                                                                                                          Manufacturing
                          4%                                                           11%

                                                                                6%                                        TME
                                                                                                         32%

                                                                                                                          BFSI
                                                   Telecom                11%

                                                   Other                                                                  Retail,T&L


                                                                                                                          Healthcare and life
                                                                                                                          sciences
                                                                                 21%
                                    96%                                                            19%                    Others



Source: Company, Angel Research                                  Source: Company, Angel Research



                                          Exhibit 5: Combined entity’s revenue mix – Vertical wise
                                                                 3%
                                                                         7%                                     Telecom

                                                                 5%
                                                                                                                Manufacturing

                                                                                                                TME
                                                           11%
                                                                                             47%
                                                                                                                BFSI

                                                           10%                                                  Retail,T & L

                                                                                                                Healthcare and life sciences

                                                                      17%                                       Others


                                          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 M’s revenue mix – Geography wise                 Exhibit 7: Satyam’s revenue mix – Geography wise



               22%
                                                                                 25%
                                  33%
                                                  Americas                                                                         Americas
                                                  Europe                                                       50%                 Europe
                                                  ROW                                                                              ROW

                                                                                 25%
                   45%



Source: Company, Angel Research                                  Source: Company, Angel Research




March 21, 2012                                                                                                                                  3
                                                               Tech Mahindra and Mahindra Satyam | Company Update



                                           Exhibit 8: Combined entity’s 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%
                                                                                                                        Top client
                                  35%       Top client
                                                                         42%                              16%           Top 2-5 clients
                                            Top 2-5 clients
                                                                                                                        Top 6-10 clients
                                            Top 6-10 clients
        10%                                                                                                             Top 11-20 clients
                                            Others
                                                                                                        14%             Others



                     32%                                                                17%


Source: Company, Angel Research                                  Source: Company, Angel Research



                                           Exhibit 11: Combined entity – Client concentration


                                                                           17%

                                                                                                    Top client
                                                         41%                                        Top 2-5 clients

                                                                                                    Top 6-10 clients
                                                                                  20%
                                                                                                    Top 11-20 clients

                                                                                                    Others


                                                                          10%
                                                                 12%


                                           Source: Company, Angel Research




March 21, 2012                                                                                                                              4
                                 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 M’s expertise
                 in mobility, system integration, delivery of large transformations and to better
                 penetrate the opportunity presented by Mahindra Satyam’s diverse set of clients
                 across multiple verticals. Similarly, Satyam’s expertise in enterprise solutions will
                 enable a more complete value proposition to be delivered to Tech M’s 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 merger’s completion. From Tech M per se, we expect the non-BT
                 business to post a CQGR of 2.4% over 3QFY2012-4QFY2013, with BT’s 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 entity’s 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 Tech’s 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                                                                                      5
                                                                       Tech Mahindra and Mahindra Satyam | Company Update



Exhibit 12: Recommendation summary
 Company              Reco.            CMP     Tgt. price   Upside     Target      FY2013     FY2013E      FY2011-13E    FY2013E    FY2013E
                                         (`)          (`)        (%)   P/E (x)   EBITDA (%)     P/E (x)   EPS CAGR (%)   RoCE (%)    RoE (%)
 HCL Tech             Accumulate        484         520          7.5    13.0          17.5       12.1            22.1       20.9       23.1
 Hexaware             Neutral           119             -          -    11.0          19.0       12.8            79.4       25.4       22.0
 Infosys              Accumulate      2,851       3,047          6.9    18.0          32.0       16.9            18.9       25.8       23.8
 Infotech Entp.       Accumulate        148         162          9.3    10.0          16.9         8.7           16.5       17.2       14.1
 KPIT Cummins         Neutral            82             -          -    10.0          15.4         5.0           19.9       19.5       16.9
 Mahindra Satyam      Accumulate         78           87        12.2    11.0          15.4       10.1            35.0       12.0       13.8
 MindTree             Accumulate        476         519          9.0    10.0          14.7         9.5           42.1       20.3       17.4
 Mphasis              Neutral           421             -          -    11.0          18.3       10.7              0.0      15.3       15.0
 NIIT^                Accumulate         50           55        10.9      6.9         16.3         6.2           19.3       11.0       15.6
 Persistent           Neutral           317             -          -      9.0         23.0         9.1             0.1      19.4       14.3
 TCS                  Accumulate      1,172       1,262          7.7    19.5          29.9       18.1            20.6       32.1       33.3
 Tech Mahindra        Accumulate        684         750          9.7    11.0          16.3         8.4           28.3       14.1       20.1
 Wipro                Neutral           427             -          -    15.3          19.7       15.4            13.1       15.3       20.5
 Source: Company, Angel Research; Note: ^Valued on SOTP basis




March 21, 2012                                                                                                                            6
                                                                    Tech Mahindra and Mahindra Satyam | Company Update




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  Disclosure of Interest Statement                                             Tech Mahindra
  1. Analyst ownership of the stock                                                   No
  2. Angel and its Group companies ownership of the stock                             No
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  Ratings (Returns):              Buy (> 15%)                      Accumulate (5% to 15%)                 Neutral (-5 to 5%)
                                  Reduce (-5% to 15%)              Sell (< -15%)


March 21, 2012                                                                                                                              7
                                                                                                                                              Tech Mahindra and Mahindra Satyam | Company Update


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Fundamental:
Sarabjit Kour Nangra                                                                   VP-Research, Pharmaceutical                                                                               sarabjit@angelbroking.com
Vaibhav Agrawal                                                                        VP-Research, Banking                                                                                      vaibhav.agrawal@angelbroking.com
Bhavesh Chauhan                                                                        Metals, Mining                                                                                            bhaveshu.chauhan@angelbroking.com
Sharan Lillaney                                                                        Mid-cap                                                                                                   sharanb.lillaney@angelbroking.com
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Ankita Somani                                                                          Research Associate (IT, Telecom)                                                                          ankita.somani@angelbroking.com
Varun Varma                                                                            Research Associate (Banking)                                                                              varun.varma@angelbroking.com
Sourabh Taparia                                                                        Research Associate (Cement, Power)                                                                        sourabh.taparia@angelbroking.com

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Shardul Kulkarni                                                                       Sr. Technical Analyst                                                                                     shardul.kulkarni@angelbroking.com
Sameet Chavan                                                                          Technical Analyst                                                                                         sameet.chavan@angelbroking.com
Sacchitanand Uttekar                                                                   Technical Analyst                                                                                         sacchitanand.uttekar@angelbroking.com

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 March 21, 2012                                                                                                                                                                                                                                                                                 8

				
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