21 March 2012
Update | Sector: IT
Tech Mahindra, Mahindra Satyam to merge
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
2:17 swap ratio; synergies over time; near term growth headwinds
Combined entity snapshot
No. of Shares - m
EPS Gr. (%)
The Board of Directors at Tech Mahindra and Mahindra Satyam approved the merger
ratio of 2 Tech Mahindra shares for every 17 shares of Mahindra Satyam.
The joint entity will have USD2.47b revenue in FY12, 75,000+ strong workforce and
350+ active clients, across 54 countries.
Our estimate for total PAT stands at INR14.8b in FY12E and INR14b in FY13E. On a
diluted share base of 211m (ex 24m treasury shares), this implies an EPS of INR70.1 in
FY12E and INR66.1 in FY13E.
The companies expect synergy from leveraging each other's expertise, economies of
scale, and standardization of business practices. We expect the synergy benefits to
start reflecting in the financials only over a period of time. However, key headwinds
persist in the near-medium term: (1) Muted revenue outlook at Satyam, and (2)
Uncertainty over BT revenues at Tech Mahindra.
The combined entity trades at 10.3x FY13E earnings. Even if we value Satyam at 12x
and Tech Mahindra at 9x FY13E PAT, our resulting target price of INR734 implies 7%
upside. Maintain Neutral.
2:17 swap ratio
The Board of Directors at Tech Mahindra and Mahindra Satyam approved the
merger ratio of 2 Tech Mahindra shares for every 17 shares of Mahindra Satyam.
The Mahindra Group will own 26.3% in the combined entity, British Telecom
will own 12.8%, 10.4% will be held as treasury stock, 34.4% to be held by the
public shareholders of Mahindra Satyam and the balance 16.1% will be held by
the public shareholders of Tech Mahindra.
Tech Mahindra will issue 103.4m new shares, thereby increasing its outstanding
shares to 230.8m and its equity capital to INR2,308m.
The completion of the merger process remains 6-9 months away.
Shareholding pattern (%)
Combined entity - Post merger
Treasury stock 10.4
British Telecom 12.8
Mahindra group 26.3
Combined entity: 75,000+ workforce, USD2.4b revenue
Tech Mahindra financial summary
FY11 FY12E FY13E
Sales (INRb) 48.4 55.3 60.8
EBITDA (INR b) 9.9
NP (INR b)
54.3 66.2 64.7
EPS Gr. (%)
7.4 22.1 (2.4)
BV/Sh. (INR) 266.0 331.7 410.9
12.6 10.3 10.6
EV/EBITDA (x) 9.7 10.4
30.2 27.3 21.3
22.1 21.1 17.1
The combined entity will have approximately 75,000+ strong work force and 350+
active clients, across 54 countries. Our estimates suggest combined revenue of
USD2.47b in FY12E and USD2.63b in FY13E.
Revenues of the merged entity will have ~53% contribution from
Telecom and Retail verticals, followed by 17% from Manufacturing. BFSI and
Technology, Media & Entertainment will constitute ~10% each.
42% of revenue from North America, 35% from Europe and 23%
from Rest of the World.
FY12E PAT of INR14.8b, EPS of INR70.1:
Our estimate for total PAT stands at INR14.8b
in FY12E and INR14b in FY13E. On a share base of 211m (excluding treasury shares),
this implies an EPS of INR70.1 in FY12E and INR66.1 in FY13E (excluding the
24m treasury shares:
The merger has also created 24m treasury shares, which will
serve the purpose of ready liquidity in case of an investment opportunity.
(Ashish.Chopra@MotilalOswal.com); +91 22 3982 5424
(Nitin.Padmanabhan@MotilalOswal.com); +91 22 3982 5426