Tech Mahindra’s equity infusion into Mahindra Satyam should comfortably bankroll the pay-off.
Mahindra Satyam’s $70 million out-of-court settlement with UK-based m-commerce firm Upaid Systems will be a touchstone for the stock as it clears the air somewhat over its legal liabilities. While the settlement figure is between the $40 million and $100 million that analysts had estimated, it is significantly lower than the $1 billion claimed by Upaid earlier.
Tech Mahindra’s equity infusion into Mahindra Satyam should comfortably bankroll the pay-off, which is to be made in two instalments — $45 million (in 10 days from receiving regulatory approvals) and $25 million (in 12 months). The settlement also provides it a perpetual, worldwide, royalty-free licence on all Upaid’s patents while settling all pending disputes. This also allows the company to focus on performance and growth.
The company’s revenue growth should look up, believes the management. Analysts suggest it has signed on new clients and achieved a degree of pricing stability. Religare’s analysts peg Mahindra Satyam’s revenue at $1-1.2 billion a year, and expect operating profit margins to improve given the tight hold on employee numbers.
For Tech Mahindra, however, British Telecom (BT) related core earnings continue to be under pressure. The tough environment doesn’t bode well for telecom revenues outlook and earnings growth is expected to be flat, according to JP Morgan research. Mahindra Satyam will be reporting numbers only in June 2010. Thus, consolidated numbers for Tech Mahindra are expected only from 2010-11 onwards. Mahindra Satyam announced the deal on Wednesday evening. Its stock was up 12 per cent intra-day and settled at Rs 108, up 5.3 per cent, yesterday. Tech Mahindra, with 42.7 per cent stake in Mahindra Satyam, was up 4 per cent during the day, but closed higher by 2.2 per cent at Rs 1,017.
Both stocks have underperformed the BSE IT index in the past three months – Mahindra Satyam by 30 per cent and Tech Mahindra by 9 per cent. With Mahindra Satyam’ fundamentals improving and the overhang of liabilities behind, both stocks should perform in line with the markets, if not better.
