Stock Review: MAHINDRA SATYAM

Mahindra Satyam, erstwhile Satyam Computer Services, has started showing signs of gradual recovery in its performance. Its stock movement has been stable overall in the past three months despite the volatility in the broader market. Improved margins, healthy cash position and renewal of projects that were on hold earlier, are key positives for the company.

In the December 2010 quarter, the company's topline rose 3% to . 1,280 crore against the previous quarter, helped by a 2.5% volume growth. Its operating profit margin improved 90 basis points to 3.4%. The encouraging performance was led by a growth in the BFSI, healthcare and manufacturing verticals. In the near term, maintaining the margin could be tough given the supply-side pressure due to high attrition, which has been hovering around 25% over the past few quarters.

The company plans to hire 3,500 freshers in the next fiscal and laterals depending upon its needs. This is likely to swell the company's operating expenses, which are already as high as 70% in relation to net sales, further. However, if the revenue growth continues, higher fresher intake may optimise the employee pyramid and fuel margin improvement in the coming quarters.

The company has a strong cash balance of . 3,000 crore. This should support its plans to grow inorganically and meet the capex target of . 200 crore for the next six months. The company has witnessed business traction in most verticals across geographies. However, a lack of scalable clients and low-ticket size deals limit its ability to compete with larger peers.

A 50 bps increase in MAT, as announced in the FY12 Budget, is likely to have a marginal negative impact on the company's profitability. At the current market price of . 62.3, the stock trades at 9.6 times its earnings for the trailing 12 months. The future trend in valuations depends upon the extent to which the new management can infuse the growth.