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Satyam’s pleasant surprise

Satyam’s pleasant surprise
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First Published: Wed, Jun 10 2009. 12 30 AM IST

Numbers game: Satyam Computer Services Ltd’s key financials. Sandeep Bhatnagar / Mint
Numbers game: Satyam Computer Services Ltd’s key financials. Sandeep Bhatnagar / Mint
Updated: Wed, Jun 10 2009. 12 00 PM IST
Bangalore/Hyderabad: Indian software company Satyam Computer Services Ltd, currently 31% owned by Tech Mahindra Ltd, on Tuesday announced better- than-expected profits for the December quarter as well as for the first two months of the fourth quarter.
Click here to watch video: Venkatesha Babu, National Corporate Editor, Mint analyzes the cause-and-effect behind Satyam’s better than expected profits.
The software exporter returned an operating profit margin of 15.87% and a net profit margin of 8.2% for the October-December period.
It reported an operating profit of Rs364 crore and a net profit of Rs181 crore on revenue of Rs2,206 crore for the quarter.
For January, the month in which founder-chairman B. Ramalinga Raju confessed to inflating Satyam’s books resulting in India’s largest accounting fraud, the company posted revenue of Rs681 crore and a net profit of Rs4 crore.
In February, its revenue slipped to Rs676 crore though the profit jumped to Rs52 crore.
Satyam didn’t provide comparable year-ago figures.
These are the first publicly disclosed numbers from Satyam since Raju’s confession.
Satyam, however, said it cannot guarantee the accuracy of the numbers as its books stretching back to 2000 are in the process of being verified by an independent auditor.
The company’s shares gained 9.95% on Tuesday to close at Rs66.85 each on the Bombay Stock Exchange on a day when the exchange’s benchmark index, the Sensex, rose 3.14% to 15,127 after Prime Minister Manmohan Singh said India could bounce back to growing at 9% a year. Tech Mahindra’s shares gained 25% to close at Rs744.20.
Apurva Shah, head of research at brokerage firm Prabhudas Lilladher Pvt. Ltd, said that while Satyam’s revenues are in line with expectations, the profits are a pleasant surprise.
The big positive is the margins as some investors were concerned profitability may drop to as low as 4% after Raju’s disclosure, he said.
Numbers game: Satyam Computer Services Ltd’s key financials. Sandeep Bhatnagar / Mint
“Now Satyam and Tech Mahindra can focus on employee retention and improving morale. The number of client additions and new business wins has been impressive,” said Diptarup Chakraborti, principal research analyst with technology research firm Gartner Inc. “I think in hindsight, L&T (engineering firm Larsen and Toubro Ltd) might regret having missed the opportunity to buy Satyam.”
The timing of the company’s results announcement coincides with the last date for dispatching open offer letters to Satyam shareholders by Tech Mahindra.
In April, the Mahindra Group company had acquired 31% of Satyam for Rs1,756 crore through a preferential allotment of shares at Rs58 each.
As required under Indian law, Tech Mahindra said it would buy another 20% in Satyam through an open offer to shareholders at the same price, involving a payout of Rs1,154.66 crore.
If the open offer fails to mop up the additional 20% required to give Tech Mahindra a controlling stake in the company, Satyam will issue additional preference shares to the acquirer.
The last date for dispatching the open offer letters to Satyam’s shareholders was revised to 9 June, from the earlier 3 June.
The open offer will now be operational from 12 June to 1 July. Minority shareholders have until 26 June to withdraw their tendered offers.
“The board of Satyam, which comprises government nominees and representatives of Tech Mahindra now, has decided to keep the information pertaining to Satyam’s financial health in the public domain ahead of (the) open offer so as to enable both the existing and prospective shareholders to make an informed decision,” Satyam spokesman M. Sridhar said.
With the market price of Satyam’s scrip about 15% higher than the Rs58 offered by Tech Mahindra in its open offer, analysts say the chances of the open offer succeeding are slim.
“This is a no brainer. The open offer will not succeed,” said Anil Advani, head of research at SBI CAP Securities Ltd.
Satyam’s third quarter performance represents a 4.45% growth in income and a substantial improvement in operating profit margin over the July-September 2008 quarter, if the confessions of the jailed Ramalinga Raju on 7 January are to be believed.
Raju had said that for the July-September quarter, the company had inflated its revenue to Rs2,700 crore whereas the actual income was Rs2,112 crore, and its operating profit to Rs649 crore against Rs61 crore.
Still, even with the new numbers, Satyam’s performance is poor compared with its peers.
For instance, Satyam earned Rs5.60 lakh revenue per employee in the October-December quarter, while HCL Technologies Ltd earned Rs7.90 lakh per employee in the same period. HCL posted an operating profit margin of 22.4% and a net profit margin of 14.3% for the October-December quarter, significantly higher than Satyam’s margins.
The fraud-hit firm still has several battles on hand. Satyam said Tech Mahindra will continue negotiations to amicably resolve outstanding disputes, including those with companies Satyam bought in fiscal 2008-09 and another pertaining to the $1 billion (Rs4,760 crore) damages sought by customer Upaid Systems Ltd.
“Some of those issues are not new. When Tech Mahindra acquired Satyam, they knew that there is a certain liability, but only if it becomes too high...then it goes as a negative,” said Shah of Prabhudas Lilladher.
The Union government had superseded the board of Satyam after Raju admitted on 7 January to have fudged the company’s books for years to the tune of at least Rs7,136 crore. The government-appointed board initiated measures to revive the fraud-hit company and sell stake to a strategic investor through an international competitive bidding process.
As on 26 March, Satyam has 215 new business orders, with contract values totalling $380 million. In the October-December quarter, Satyam lost 66 customers, losing orders worth $183 million. It also lost 2,348 employees in January and February.
After Raju’s confession, Satyam reported collections of Rs2,064 crore and payments of Rs2,203 crore for the January-March quarter, and ended the period with a cash balance of Rs373 crore.
In this period, Satyam raised some Rs569 crore of loans from lenders, including Citibank NA, IDBI Bank Ltd, Bank of Baroda and HDFC Bank Ltd. It also provided Rs184 crore of corporate guarantees to its subsidiary, Satyam BPO. The company also had an undrawn loan of Rs316 crore from IDBI Bank, Bank of Baroda and HDFC Bank.
In the January-March quarter, Satyam paid Rs1,836.36 crore towards operating cash outlays and Rs336.98 crore towards non-operating cash, taking the total cash outlays to Rs2,203.34 crore. As of 28 February, the company had some Rs1,911 crore of accounts receivable and current liabilities of Rs2,114.06 crore.
K. Raghu in Bangalore and Bloomberg contributed to this story.
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First Published: Wed, Jun 10 2009. 12 30 AM IST