Business as usual

Mahindra Satyam operations back on track; Tech Mahindra merger in less than a year.

There were no negative surprises from Mahindra Satyam, when it announced the fourth quarter and full year results. While the company reported a consolidated net loss of Rs 327 crore for the quarter ended March 2011, as against net profit of Rs 59 crore in the third quarter, what has caught the fancy of analysts is the volume growth and doubling of margins to 13 per cent from 6.4 per cent in the third quarter.

The company clocked 3.5 per cent increase in volumes and added 12 new clients, including three deals in the $10 million category. In fact, the new logos have contributed to nearly 2 per cent of the revenues, the management conveyed in its after-result call with analysts. Given that the last quarter is typically considered to be a weak quarter, but if Mahindra Satyam has seen traction in this quarter it indicates operations are on track.

The management has conveyed the company is getting deals across sectors and geographies. The overhang of the Satyam scandal is no longer an issue as the company is not stopped from bidding for projects and many of the older clients have also come back. Building a typical sales cycle, Standard and Chartered Securities expects it to reflect in deal wins in couple of quarters. This means the company’s growth will be in line with that of the industry (16-18 per cent).

However, what remains to be seen is whether or not utilisation levels improve and how much does wage increase impact profitability. Analysts believe current utilisation could be in the range of 70 per cent, below reported levels, given weak internal tracking systems. This affects manpower costs of the company at 75 per cent of revenues versus 56 per cent for Infosys.

Thus, a high attrition of 25 per cent in third quarter could, in fact, act as a boon in the near-term when coupled with lower unit-cost replacement in an up-trending volume growth scenario.

Finally, with the settlement of the class action suits, all hurdles to the merger between Mahindra Satyam and Tech Mahindra seem to have been addressed. It’s an eventuality that the company is working towards. However, before that the company needs to move to US GAAP accounting norms. However, the company is confident the process will be kicked off and could be completed over the next 12 months.