Stock Review: MAHINDRA SATYAM

After being hit by one of the biggest corporate scandals, Hyderabad-based Mahindra Satyam seems to be back on the growth trajectory. The company posted profit of . 225 crore for the June 2011 quarter against a loss of . 327 crore in the previous quarter. The bottom line swing triggered over 13% jump in the stock price to . 80.5 in intra-day tarde on Wednesday. It closed at . 78.35, up 10.2% over the previous day's close.

In the June 2011 quarter, Satyam posted a 4.3% sequential growth in top line at . 1,434 crore, driven by a 3.9% volume growth. Growth continues to be led primarily by emerging markets which reported nearly a 13% increase in revenues on a sequential basis. However, US and European markets posted lower than 3% growth – lower than its average for the past two quarters now.

On the margin front, the company posted 160-basis-point increase in its operating profit margin to 14.6%. This is still lower than that of other industry rivals. But to its credit, the company posted margin expansion which was absent in the case of big players, which struggled to retain margins due to salary hikes.

Satyam has posted more than a 12-percentage-point improvement in operating margins over the past two quarters. Moreover, the management expects to report margin in line with the industy's range of 20-29% within the next 6-8 quarters, driven by a strong volume growth, employee pyramid resructuring with higher number of freshers and better price realisation due to improved business mix.

Near term, a 12% wage hike offshore and 2.5-3% onshore are likely to act as a headwind. Satyam has deferred salary hikes until October 2011 which implies a margin pressure during the third quarter.

Satyam has been successful in re-engaging several old customers it had lost previously. It has seen traction across verticals. Currently, it is sitting on cash balance of . 2,650 crore. It has chalked out plans to grow inorganically and is looking for opportunities in near future.

Another positive factor is synergy benefits from merger with parent Tech Mahindra. Its intention to exit the US stock market by winding down its American Depository Shares (ADS) programme in 2012, indicates that the merger is on cards anytime soon.
Given its synergy benefits from the merger, abating legal concerns, improving business traction and margin expansion, the company is expected to fare well. However, turbulent global economic conditions may act as a headwind.