Mahindra Satyam’s third quarter results below expectation, says Nomura
Moneylife Digital Team 01 February 2013

Among verticals, manufacturing, technology, media and entertainment dragged while the emerging vertical (largely government) revenues increased by $7 million and was the primary driver for incremental revenue addition in the third quarter FY13 for Mahindra Satyam

The key disappointment in Mahindra Satyam’s third quarter results for FY13 was flat revenue growth in constant currency terms versus 2%-4% quarter-on-quarter growth at Tier-1 IT (information technology) peers. Nomura Equity Research sees downside risks to the revenue growth estimate of 9% (in dollar terms) in FY13F, as it would entail 5.5% quarter-on-quarter growth in Q4, which it believes might be difficult to achieve. Higher than anticipated net profit was aided by higher other income and lower depreciation, points out Nomura in its Quick Note. Tech Mahindra owns 43% of Mahindra Satyam and its merger with Satyam is pending with a stock swap ratio of one share of Tech Mahindra for every 8.5 shares of Satyam. The merger with Tech Mahindra is awaiting Andhra Pradesh High Court approval.


Among verticals, manufacturing (-2% quarter-on-quarter), technology, media and entertainment (-4% quarter-on-quarter) dragged, while the emerging vertical (largely government) revenues increased by $7 million quarter-on-quarter (29% quarter-on-quarter growth) and was the primary driver for incremental revenue addition in the third quarter of FY13, according to Nomura analysts.


A prominent observation made by the management of Mahindra Satyam to indicate its future business prospects is that the company has given 2,000 campus offers for FY14F. The company’s headcount increased by 169 people sequentially to 36,956 in the third quarter of FY13. Utilization increased to 77.1% (excl trainees) in the same period.


In the third quarter FY13, the company won deal flows in excess of $100 million in total contract value in verticals like manufacturing, healthcare and retail. Since closure for the deals won happened towards the end of the third quarter, Mahindra Satyam management expects revenue contribution to follow from fourth quarter onwards.


Revenues of the company stood at Rs19.4 billion versus Nomura’s estimate of Rs19.6 billion. Adjusted net profit (excluding Rs2.9 billion charge related to settlement with Aberdeen UK) at Rs3.7 billion was up 35% quarter-on-quarter. The company’s performance figures were higher as they were aided by a nearly Rs67 million quarter-on-quarter reduction in depreciation to Rs361 million and other income of Rs1.1 billion, according to Nomura.


Mahindra Satyam’s cash and cash equivalents was Rs33 billion in the third quarter of FY13.


Among services, IT Services was flat quarter-on-quarter, while BPO was up 18% quarter-on-quarter contributing all of the incremental revenue addition. BPO was driven by retail sector demand ahead of the holiday season, according to Nomura.


The adjusted EBITDA margin decline in the third quarter was on account of higher sub-contractor costs and a one-time expense of $4 million related to payment to an alliance partner for technical services. EBITDA margin ex of the Tech Mahindra employee bonus provision reversal adjustment (Rs335.5 million of reversal taken) was 21.6%.


According to Mahindra Satyam’s management, the company sees deal flows in infra, enterprise applications and engineering services for the future.

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