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Mahindra Satyam needs two years to stabilize operations

Mahindra Satyam needs two years to stabilize operations
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First Published: Tue, Apr 13 2010. 11 36 PM IST
Updated: Tue, Apr 13 2010. 11 36 PM IST
Hyderabad: Software services firm Mahindra Satyam will need another two years to completely stabilize its operational metrics, chief executive officer C.P. Gurnani said on Tuesday, the first anniversary of Tech Mahindra Ltd’s acquisition of Satyam Computer Services Ltd.
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The company marked the anniversary by announcing the commencement of a 26-acre information technology special economic zone (SEZ) in Hyderabad, which will have a built-up area of 400,000 sq. ft of space ready for occupation in six months.
“It is only one year since we took over. Another two years (have) to be completed to level out some of the score cards,” Gurnani told reporters, replying to a question about the company’s head count, margins and profitability.
The firm had 380 clients at the time of the acquisition. It gained 40 clients and lost three, bringing the number to 417 as of 28 December.
A company spokesperson said the firm has 28,000 employees currently, compared with 41,622 at the end of March 2009. Mahindra Satyam plans to hire 4,000 people in the current quarter.
Satyam fell into a crisis after its founder chairman B. Ramalinga Raju on 7 January 2009 confessed to overstating the company’s accounts by Rs7,136 crore, making it India’s biggest accounting fraud. Tech Mahindra gained a controlling stake in Satyam at an auction arranged by a government-nominated board, and currently holds a 43% stake.
Gurnani said that in the past year the firm had focused on bringing down management layers by half to seven from 14, enhancing client interaction and improving transparency.
“Most companies have remained on cost management for the past 18 months and now there are signs of recovery,” Gurnani said about the business outlook for IT companies. “Mahindra Satyam would definitely like to play a part there.”
The company will meet the June deadline for the restatement of its accounts, said Vineet Nayyar, chairman of Mahindra Satyam.
Satyam’s shares rose Rs1.65, or 1.76%, to Rs95.45 at the close of trading on the Bombay Stock Exchange on a day when the benchmark Sensex eased 31.04 points, or 0.17%, to 17,821.96. Tech Mahindra shares fell Rs2.40, or 0.28%, to Rs846.05.
Analysts remain cautious about the company’s prospects. Srishti Anand, information technology analyst at ICICIdirect.com, said she was sceptical about Satyam attaining parity with the operational metrics of the top IT companies in the next two years.
Anand argued that with improving demand and wage hikes being offered by competitors, Satyam would be hard-pressed to hold on to its employees and will need to maintain a bench equivalent to at least 30% of its workforce to meet demand.
“Because of an unstable employee pool, utilization rates will remain capped at 70%,” Anand said. The top companies will see much better utilization levels of 75-80% in the next two years as they benefit from better client-mining in an improved economic scenario.
Anand reasons that just to keep up with the growing clientele of tier 1 companies, Satyam will have to make higher sales and marketing investments, leaving it without many levers to scale up Ebitda (earnings before interest, taxes, depreciation and amortization) margins, a measure of profitability.
“Overall margins for Satyam will remain subdued in the 18-20% range in FY12 which is much lower than tier-1 companies, as well as tier-2 companies such as Mphasis (Ltd) and MindTree (Ltd),” said Anand.
Sudin Apte, an analyst at Forrester Research Inc., said Mahindra Satyam may find it’s a little late in bridging the gap with India’s top three IT firms— Tata Consultancy Services Ltd, Infosys Technologies Ltd and Wipro Ltd. Satyam was ranked India’s fourth biggest IT services company before the accounting scandal erupted.
Making Mahindra Satyam’s task tougher is the fact that Western IT firms are now bridging the cost gap with India. Forrester Research has identified six pain points for Satyam, including the employee attrition rate, the inability to attract big-ticket clients and a low-margin model.
Minister of corporate affairs Salman Khursheed, who was present for the commencement of the company’s SEZ, said reports by the Serious Fraud Investigation Office and the Institute of Chartered Accountants of India on the Satyam fraud will be made public in the next two weeks.
PTI contributed to this story.
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First Published: Tue, Apr 13 2010. 11 36 PM IST