Mahindra Satyam: Ongoing struggle

Despite revenues stabilising, most operating parameters weaken

Mahindra Satyam (erstwhile Satyam Computer Services) clawed its way back to profit in the first half of the current financial year, even as it struggled with supply issues, including high attrition and salary costs that have gripped the information technology sector. Consolidated revenues fell about 0.5 per cent sequentially to Rs 2,490 crore in the first half of 2010-11.

Salary increases (three per cent onsite and 15 per cent offshore) and lower utilisations hurt earnings before interest, tax, depreciation and amortisation margins, which contracted 380 basis points sequentially to 5.92 per cent, distinctly lower than the 2009-10 level of over 10 per cent. A sharp fall in litigation costs, forensic investigation and restructuring in 2009-10, along with a non-operating income boost of Rs 104.5 crore (including forex gains), bumped up profit in the first half of the current financial year to Rs 192 crore, as against a loss of Rs 125 crore in the corresponding period a year ago.

The company expects healthy revenue traction, driven by existing clients and increased participation in large deals after the disclosure of latest financials. Among services, the key growth drivers are expected to be enterprise business solutions, engineering services and business process outsourcing, says an IIFL report. Key concerns continue to come from the supply side, with attrition staying around 25 per cent (annualised).

The markets were more optimistic in the last one month, pushing the stock up over one per cent, while expecting a favourable merger structure announcement with Tech Mahindra. However, the management indicated the merger could take almost a year. Lack of clarity on the revenue and margin outlook is an added drag.

The stock ended 11.85 per cent lower at Rs 74.4 on Tuesday. Analysts believe it will be some time before the company can measure up to the peer performance, which will keep the stock muted. However, the merger ratio, when announced, could act as a trigger.