But some analysts are foxed by operating margins.
Fraud-hit Satyam Computer Services continued to surprise the markets today. The Satyam stock closed at Rs 73.50 from the previous close of Rs 66.85, while Tech Mahindra’s stock also closed at Rs 784.85, up 5.4 per cent from the previous close.
About 4.78 million shares of Satyam were traded on both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Close to 13.69 million shares of Tech Mahindra were traded on both the exchanges.
Satyam posted 'better-than-expected' results for the quarter-ended December 31, 2008 to reveal robust top line and bottom line figures. Simultaneously, the company disclosed positive top line and bottom line numbers for January and February 2009. Hence, even as the company is yet to restate its accounts, investors reciprocated enthusiastically over the past two days, with the Satyam stock hitting the upper trading circuit both yesterday and today.
Sequentially (as compared to the trailing quarter), though, Satyam saw a 14.3 per cent loss in revenue and a 72 per cent dip in net profit. Moreover, in comparison (for the October-December 2008 quarter), India’s largest IT services provider Tata Consultancy Services (TCS) recorded a 4.65 per cent sequential rise in revenue and a 7.1 per cent rise in net profit.
Infosys posted a 6.8 per cent rise in revenue and a 14.6 per cent increase in net profit. Wipro Infotech posted a 6.9 per cent increase in revenue and a 4.9 per cent rise in net profit, while HCL Technologies recorded a 5.1 per cent rise in revenue and a 4.8 per cent increase in net profit for the same period.
Reactions to these “unaudited and unverified” numbers are mixed. “Our analysis shows that the Satyam acquisition could prove to be EPS-accretive for Tech Mahindra, given the disclosure of the above information. We believe the acquisition could add a significant 42 per cent to Tech Mahindra’s FY2011(estimated) EPS (earnings per share). However, the lawsuits remain a major concern and the likelihood that the actual audited results could differ materially from those stated remain key risks. The appreciation of the rupee against the dollar of late is another risk that needs to be borne in mind. However, considering the value and EPS accretion that now will accrue to Tech Mahindra, we upgrade the stock to accumulate with a target price of Rs 845, implying a price-to-earnings (P/E) multiple of 11x FY2011E EPS,” an Angel Broking report stated.
“The numbers are just for two months. Based on that, we think — on an annual basis — the EPS should be Rs 9. But then, the company has 10,000 employees on the bench, which needs to be addressed. On the margins front, there is a huge swing. The January operating margin was 9 per cent but, for the month of February, it was 17.5 per cent. Besides, the company has lost key market clients, which is a concern. It also means that Tech Mahindra will have to work really hard to get those clients back,” KR Choksey Securities’ Managing Director Deven Choksey said.
However, others remain foxed by the operating margins of almost 9 and 19 per cent, respectively, since its founder Ramalinga Raju had said the company’s operating margins had dipped to almost 3 per cent in his January 7 confession to fraud.
Satyam’s EBITDA or operating margins (consolidated) for 3QFY09, January and February were 14.7 per cent, 8.3 per cent and 16.5 per cent, respectively.
“It is interesting to note that the margins for 3QFY09 are much higher than the margin run rate that Raju had indicated in his 7 January letter when he suggested Q2 operating margins of approximately 3 per cent,” states a Citi Investment Research & Analysis report.
The loss of business was $92 million for Q3. Orders withdrawn are $91 million over the next 12 months. Simplistically, annualising the same (assuming that a large part of it is recurring business), the impact is $450 million.
The new business gained post the event (as on 26 March) is $380 million (total and not annualised). The debt (including guarantees) was Rs 820 crore at the end of March, while cash on books was Rs 370 crore.
Citi analysts add that they are not positive on Tech Mahindra at this point since “...we still have no feel for Satyam’s margins, as audited financials are not available. The margin range of 3 per cent (as per Mr Raju’s letter) to 16 per cent (margins in February as per disclosures) is very wide. Tech Mahindra’s core business continues to be under pressure — with significant pressure on revenues from BT.”
L&T happy with numbers
It’s an irony, but Satyam’s surprisingly good numbers for the quarter ended December 2008 have come as a big relief to Larsen & Toubro (L&T), the company which lost the bid to take over what was once India’s fourth-largest software company.
This is because L&T has a 12 per cent stake in Satyam, bought at Rs 636 crore and the value works out to roughly Rs 81 a share. L&T now feels it will be able to derive value from its investments going forward after the Satyam stock hit the circuit for the second day running to close at Rs 73.50 on the Bombay Stock Exchange today.
Tech M market cap doubles post takeover
The acquisition of fraud-hit Satyam Computer Services has resulted in phenomenal returns for the shareholders of Tech Mahindra. Even before the transaction is completed, Tech Mahindra’s share price has appreciated nearly two-and-a-half times.
Its market capitalisation is at Rs 9,554 crore now, compared with Rs 3,896 crore on April 9 (just before the deal’s announcement on April 13).
Board to meet today
The board of Satyam Computer Services, comprising the six government-appointed board members and recently-inducted four members from Tech Mahindra, is meeting on Thursday. The board will take stock of the ongoing business. "The board will take stock of the business. Will see how many customers are left, how many new orders were received and what needs to be done.
But, most importantly, the new board members, which have officially joined the board, will be present in person at the meet at our Hyderabad office," said a source close to the development.The board meet will decide on Satyam's action plan for the next three months, including the issue of surplus staff, said Corporate Affairs Minister Salman Khursheed.
