Satyam beyond 8216;Rajulisation8217;

A PAT on the back is not such a bad thing sometimes,even if you happen to respond to the name of Mahindra Satyam.

A PAT on the back is not such a bad thing sometimes,even if you happen to respond to the name of Mahindra Satyam. The company is coming out of choppy waters after restating its accounts and,though some cynics doubt the veracity of the restated accounts as well,looking towards the future is the wiser option and a more practical one. The Rajulisation of the brand still hurts the core of the Indian IT firmament,largely viewed as a beacon of Indian enterprise and entrepreneurial drive. Towards that end,the imminent merger between Tech Mahindra and Mahindra Satyam,and the resultant strength of the combined entity,could only be good news for the industry.

The merger process will be off the blocks once Mahindra Satyam comes out with the restated accounts under the US GAAP,expected to happen towards the end of the financial year. Some say that the process would be initiated in mid-November when the company will announce the results of the first two quarters of the current fiscal. Either way,it is something worth keeping an eye on. Tech Mahindra holds around 45 in the company,and in terms of market capitalisation that would translate into Rs 4,500 crore. Mahindra Satyam has an m-cap of over Rs 10,000 crore and while it is still early days with the closure of FY11 some distance away,analysts feel that numbers and trends point to a favourable ratio for the company.

Mahindra Satyams EBITDA margin stood at 8.3 in FY10,as compared to 3.4 in FY09. This is an indication of the improvement in the companys fortunes and it can nudge forward from now. Considering the fact that it is still able to win new clients in good numbers and retain some of its high-margin customers,the EBITDA levels are not something to lose sleep over. The consensus among market watchers is that the company can look to achieve EBITDA margins of around 15 towards the end of this fiscal. And that could compare very favourably with the other mid-cap firms.

Mahindra Satyam is looking to add 3,000 more employees. Alls well there. The IT business follows a linear model and more business will ensue additional recruitment. In FY10,revenues touched Rs 5,481 crore as per the restated accounts,with the employee count at 27,000. So a back of the envelope calculation shows that volumes could move up by well over 10 this year,taking the new hires into account. Analysts believe the firm could have an EPS of around Rs 7-8 by then,providing a valuation of Rs 120-130. Equity analysts feel that this is a price that investors can hold on to for a year or so. Good tidings,one must add.

Between April 13,2009 the day of the Tech Mahindra acquisition,and March 31,2010,Satyam added 44 new clients. Today,it has around 350 active customers. According to company officials,some of these clients are at the end of their contract periods and may soon cease to be customers. This could drive down the revenues in FY11,and that is a significant point. Between December 16,2009,and January 7,2010,the company had lost 198 accounts. Thats a frightening number,but these are extraordinary circumstances.

In fact,some of the employees at the companys Hyderabad headquarters are wary about the merger prospects. There are apprehensions whether that will trigger another round of job cuts. But Mahindra Satyam is trying its best to downplay those fears. Analysts feel the combined entity may have excess staff,upwards of 7,000. The companys official stand on this sensitive issue is that the merged entity will provide abundant opportunities for its associates. Officials say that the combined entity will be stronger,encouraging joint go-to-market strategies,and that it will lead to increased opportunities for all.

Still,the merged entity is expected to have over 60,000 employees,with Tech Mahindra having a staff strength of 35,267 and Mahindra Satyam holding 27,500. Analysts feel that rationalisation of headcount is important,especially with Mahindra Satyam operating at profitability margins of around 8,which is a third of what the top four IT bellwethers reported for the same period.

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Another fallout of the merger would be the exit of British Telecom BT from Tech Mahindra. The London-based telecom giant,which holds 30.83 in Tech Mahindra,is reported to be in talks with strategic partners/PE investors. It is said that BT has no long-term interest in holding on to its stake in the merged entity. For the past two years,the company has been looking to divest its stake in Tech Mahindra,but it had kept its plans on the backburner due to the economic downturn.

Mahindra Satyam,though,cannot afford to wallow in the past. The past is a shadow,albeit a nightmarish one,but it is time to look forward. It needs to invest in cloud computing and other innovative means of services delivery such as platform-based BPO,which would call for substantial investments. At Rs 20 lakh,the revenues per employee for Mahindra Satyam are in line with that of larger peers like Tata Consultancy Services,Infosys and Wipro. For Vineet Nayyar and CP Gurnani,the work has only begun.