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Merill Lynch Upgrades Satyam and Infotech Enterprises

February 3, 2007

DSP Merill Lynch has upgraded Satyam Computer Services Ltd to a BUY rating with a price target of Rs 575. Though Satyam missed the 3Q Rupee revenue and profit guidance due to forex losses, margin improvement was ahead of expectation. DSPML raises FY08 and FY09 EPS estimates by 5 and 10% to Rs 25.52 and Rs 31.60 and price target by 15% on roll-forward of forecasts.

While Satyam met its USD revenue guidance, a steep Rupee appreciation and relatively lower hedging than peers resulted in a 3Q revenue and EPS guidance (before Restricted Stock Unit charge) by ~0.5% and ~3.7%.

20 to 25% PE discount to Infy may continue
Satyam’s 20 to 25% PE discount to Infosys may sustain given lower visibility to earnings, as reflected in the revenue and profit miss this quarter and lower forecast earnings growth of ~23% CAGR vs 30% for Infosys and TCS.

Infotech Enterprises Ltd:
Based on a robust operating performance in Q3FY07 and sustainable EBITDA margin expansion, DSPML has revised Infotech’s FY08 and FY09 earnings estimates upwards by 10 and 9% respectively to Rs 24.9 and Rs 30.95 . Based on this they have set a target price of Rs400 (17% potential upside from current levels) at a target PE of 16x FY08E and at a target PEG of 0.5 for FY08E to FY07-09E growth.

EBITDA margin expanded by 100bps driven by utilization (150bps impact). Given room for further improvement in utilization, increasing proportion of EMI revenue and scale benefits we believe these improvements are sustainable. GSD growth picked up (grew 9% qoq) ahead of our expectations, post two flat quarters driven by strong order intake of GBP6mn in Europe, ramp-up in clients like Swisscom, and growth in US operations. EMI grew by a robust 9% qoq driven by a ramp up in existing clients like Bombardier and Alstom.

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