Stock Review: Mahindra Satyam

MAHINDRA Satyam's latest quarterly numbers look disappointing prima facie. The company reported lower-than-expected profitability against the backdrop of no significant announcements about new client wins. The management commentary suggests that investors may have to wait for at least six quarters to see a meaningful growth in operations.

   Mahindra Satyam (MSat) has announced quarterly results after a lull of nearly eight quarters following the accounting shenanigans of its previous promoters. The company had disclosed its annual accounts in late September with operating margins that surpassed expectations. This had left investors asking for more from the management.

   However, at 5.7%, MSat's margin on earnings before interest, tax, depreciation and amortisation (EBITDA) was much lower than over 8% for FY10. Furthermore, its active client number shrank to 217 from 300 as reported for the previous financial year. MSat seems to be struggling for a breakthrough with new accounts. To add to the worries, the average number of days it took to collect receivables looks pretty high at 100 days compared to 60-80 days for its peers. The company also continued to face a steeper attrition of 25% during the September 2010 quarter.

   These factors are likely to lead to some selling pressure on MSat's stock when stock markets open on Tuesday. A major concern for analysts is margins may not have bottomed out just yet and if that is true, then the company may lose its current valuation further.

   The management's commentary indicates that the complete turnaround would not be just round the corner, but rather it would be a gradual process spanning over next two years. While this is true, a silver lining is that the company has won domestic government contracts in recent times in competitive biddings, according to industry trackers. It has also bid for more of government work. This provides some assurance about its ability to get back to normalcy in due course. On the international front, it is witnessing traction from various verticals.

   The company has also added more than 300 employees in the past quarter amidst heated job market for IT talent. This is a positive sign. Margin pressure may ease a little, given that the salary hikes are behind.