Satyam Computer's 3QFY11 results were better than we expected on revenues and EBITDA, although the revenue growth profile was not broad-based. Considering the ongoing restructuring of its operations, we expect high earnings volatility qoq going forward. We raise our target price from Rs60 to Rs66.

Europe driving revenue improvement in 3QFY11
Satyam registered 4.3% qoq growth in USD revenues during 3QFY11 (we expected 1.9%). However, this was largely driven by Europe, with its contribution increasing to c30% versus 26% in 2Q (c20% qoq growth). Revenues from US remained flat. Volume growth was lower at c2.5% qoq, with the increase in blended pricing largely due to higher onsite revenues (up c50bp to 58.7% of revenues), a change in revenue mix and likely positive cross-currency benefits. Like-for-like pricing remained flat. Net employee additions of 764, as well as three deal wins in 3QFY11, indicate qoq revenue growth should continue in 4QFY11F.

EBITDA margins improved 50bp qoq
Besides better-than-expected revenue growth and the resulting utilisation rate improvement (to 73.5% versus 71% in 2Q), lower employee costs resulted in an EBITDA margin improvement to 6.4% (our expectation 5.7%) versus 5.9% in 2QFY11. Employee costs declined qoq due to lower provisions for gratuity (with higher interest rate assumptions). With margins bottoming out, we continue to expect cost efficiencies due to likely improvement in revenues going forward. However we re-iterate that a material margin catch-up to near peer levels looks challenging in the medium term.

Estimates and target price raised; re-iterate Hold
We raise our FY12 and FY13 USD revenue estimates by c5% each on the back of the betterthan- expected revenue performance in 3QFY11, as well as likely improved growth visibility in the medium term. With high operating leverage, the upgrade in EBITDA is higher at 7-8% for FY12F and FY13F. Hence, we raise our target price to Rs66 (from Rs60), which indicates a FY13F target EV/EBITDA multiple of c6x (similar to our earlier target multiple which was based on a 55-60% discount to our target multiple for the industry benchmark, Infosys). We await more conclusive data points showing consistent broad-based demand growth before we can consider turning positive on the stock. We reiterate Hold.