Satyam ekes out Rs23.30 crore profit; but there are many bumps ahead before it scripts its turnaround  

November 16, 2010

Margin recovery will be keenly watched; proposed merger with Tech Mahindra will be another key driver of future growth

Mahindra Satyam (formerly known as Satyam Computer Services) on Monday declared the financial results for the first and second quarter of the current fiscal, for the first time since it was hit by the biggest corporate fraud in January 2009 when its then founder B Ramalinga Raju confessed to fudging the company's accounts to the tune of nearly Rs7,000 crore.

The IT services major posted consolidated profit of Rs23.30 crore for the July-September quarter this fiscal, down a huge 76.10% from Rs97.50 crore in the previous quarter as higher wage costs impacted its margins. Revenue in the second quarter stood at Rs1,242 crore, a marginal fall of 0.44% over Rs1,248 crore in the June 2010 quarter.

"The dip in net profit in the second quarter was on account of employee costs...The company gave pay hike of 15% in the second quarter," Mahindra Satyam chief financial officer S Durgashankar said at the announcement of the company's results.

Mahindra Satyam's headcount has gone up from 27,722 at the end of June 2010 to 28,068 at the end of September quarter.

"We are looking at hiring about 5,000 young graduates from management and engineering schools, for next financial year. To meet our regular business requirements, our HR team will be hiring about 4,000 professional in the next six months," chairman Vineet Nayyar said.

But the road ahead might not be very smooth. Mr Nayyar has been quoted as saying,
"Satyam should be viewed as a patient, which has spent almost a year under intensive care. It hasn't yet reached its full strength and is still convalescing…"

Tech Mahindra, which bought Satyam in April 2009 and is operating it as an independent company, said consultation (for merger of Mahindra Satyam) with Tech Mahindra with board members of both the companies has started along with the process of legal consultations.

Commenting on the company's financial performance, brokerage firm Religare Capital said, "While the revenue decline has stemmed, the current revenue run-rate is tracking below FY10 and the margin turnaround is taking longer than we anticipated. Post the disappointing numbers we expect the stock to correct as margin recovery could be long drawn and is likely to coincide with the announcement of Tech Mahindra merger, which could be an overhang."

The brokerage added, "The company has debt of Rs34.2 crore and a cash balance of Rs2530 crore against Rs2180 crore at the end of FY10, implying a cash generation of Rs350 crore. Debtors rose to Rs1090 crore versus Rs923 crore for FY10.
Provisions have gone up slightly to Rs1630 crore from Rs1500 crore while Rs1230 crore provision in suspense account pending investigation remained the same. Net worth was Rs1990 crore implying a book value per share of Rs17.  In our view the current cash balances and positive cash generation should be enough to meet any class action lawsuits that should come their way."

BRICS Securities opined, "We prefer to wait for at least a quarter to ascertain growth  prospects.  The company maintains financial result declaration will help it significantly while bidding for projects, as declaration of updated financials removes obstacles regarding compliance."

Will Satyam finally mange to script its turnaround story?

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security).— Moneylife Digital Team