>TECH MAHINDRA (ICICI DIRECT)

Positive disclosure but already priced in…

Tech Mahindra disclosed Satyam’s financial details, which came in above market expectations. The company has stated that these financials details were not audited and the audited numbers could materially be different.

Numbers positively surprise
Satyam, according to the disclosures made by Tech Mahindra, had standalone revenues of Rs 2294 crore for Q3FY09. For January and February the sales were Rs 681 crore and Rs 676 crore, respectively. If one were to aggregate, the annual run rate comes to Rs 8762 crore, which is around $1.75 billion. However, the company has lost significant business and key personnel in March. Thus, we believe the annual run rate could be lower than $1.75 billion. (At the press meet Vineet Nayar had stated that the run rate could settle around $1.3 billion).

The biggest surprise came in on the margin performance front. A 17.5% operating margin was way above expectation of a low single digit margin expectation. We believe that in the near term the company could do well to maintain this level (as there is pressure on revenues in the near term). However, in the long run, cost rationalisation and revenue stability could push up margins (employee rationalisation and further reduction in SG&A costs).

Customer — a lose-win situation
As of March 26, Satyam partially or totally lost around 66 customers and won deals from around 215 existing customers. In total, the company lost business worth $183 million (including $91 million expected over the next 12 months) and won deals worth $380 million.

Litigations – difficult to ascertain financial impact
The company is facing litigations with respect to the acquisitions made by the company in the past as well as US class action law suits, unpaid litigation and unacknowledged claim of Rs 1230 crore. It is too early to ascertain the impact of the same on the financials of the company. However, it could materially impact the performance if the settlements go against Satyam.

To see full report: TECH MAHINDRA