The disclosure of Mahindra Satyam’s financials for the financial years 2009 and 2010 was a mixed bag, with analysts sounding positive but the markets giving a thumbs down. While the company’s top line of $1.1 billion for 2009-10 was largely in line with analysts’ estimates, the real surprise came in the Ebitda margin of 8.3 per cent. The company has been able to strengthen its books also; the negative net worth of last year now stands at a positive Rs 1,800 crore. However, doubts about the growth prospects and the exodus of clients are what the market did not like. The stock gave up most of the gains recorded last week and closed 8 per cent down on Thursday.
Worst is over
The major good news in Wednesday’s announcement was the operating profit margin of 8.3 per cent for 2009-10, which is higher than the 5-7 per cent the Street was expecting. The improvement in profitability came on the back of a 40 per cent cut in the operating cost.
On the flip side, it lost several clients post January 2009 — about 200 to 350 (including 44 added in the last financial year)including well-known companies like Caterpillar, Coca-Cola and Telstra. Consequently, revenues plunged about 38 per cent in 2009-10. Compared with 2008-09, client losses impacted revenues by $800 million. Besides, experts suggest the revenue run rate for the first half of 2009-10 would be higher than the second half as the company was servicing some of its lost clients due to prior commitments. This indicates the importance of the quarterly financials that the company would announce in November 2010, besides the company’s ability to garner new clients and scale up revenues.
| FAR FROM COMFORTING | |||||
| In Rs crore | FY08 * | FY09 | FY10 | FY11E | FY12E |
| Revenues | 8,474 | 8,813 | 5,481 | 5,940 | 6,653 |
| Ebitda (%) | 21.70 | 3.40 | 8.30 | 13.00 | 15.00 |
| Adj PAT | 1,684 | -185 | 293 | 625 | 850 |
| EPS (Rs) | 14.4 | NA | 2.5 | 5.3 | 7.3 |
| P/E (x) | - | ||||
E: analyst estimates
Outlook
While the company has lost a large number of customers and employees, the positive aspect is that the worst is behind. “With the clouds of uncertainty disappearing over the financials, more RFI (request for information) would come. The company would need to gain smaller clients before class-one clients come on board,” says Arup Roy, senior research analyst, Gartner.
In short, analysts suggest the company should start witnessing a rise in revenues in the coming years. The company, which had battled a reduction in employee strength consequent to business realignment and attrition, is now looking to add over 3,000 employees in 2010-11, an indication of the management’s confidence for the future. While the cash and investments on hand worth Rs 2,807 crore (as against a debt of just Rs 42 crore) provide confidence, its balance sheet looks strong to weather any future pressures. However, liabilities in the form of class action lawsuits ($68 million) and other claims could affect profitability. Additionally, with the US economic recovery still weak, it could act as an overhang on the stock.
At Rs 90.10, Mahindra Satyam’s stock is trading at 13 times its 2011-12 estimated earnings, which is not cheap.