×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Mahindra Satyam: limited scope for further cost cuts

Mahindra Satyam: limited scope for further cost cuts
Comment E-mail Print Share
First Published: Thu, Aug 11 2011. 12 49 AM IST
Updated: Thu, Aug 11 2011. 12 49 AM IST
Software services provider Mahindra Satyam has reported better-than- expected results for the second quarter in a row. What’s more, it has been beating estimates by quite a margin.
In the June quarter, the rebranded Satyam Computer Services Ltd’s earnings before interest and tax (Ebit) rose 28% sequentially, thanks to a healthy 4.3% increase in revenue and an improvement of 168 basis points in margins. Note that this comes on the back of a huge 205% sequential jump in Ebit in the March quarter. In the past two quarters, margins have improved by 824 basis points. On a year-on-year basis, Ebit margins have improved from low single-digit levels to a more respectable level of 12%.
But it now appears that the company has nearly exhausted cost-side levers for improving margins. For margins to rise further, its billing rates need to increase from the current levels. A post-results report by Emkay Global Financial Services Ltd points out, “While Mahindra Satyam’s margins have continued to surprise us positively over the past two quarters, we see limited room for any further cost rationalizations, given the fact that the company’s per employee costs are similar to tier I peers such as Infosys and TCS (Tata Consultancy Services Ltd) despite higher onsite business, and also that its non-manpower expenses are in line with tier I peers. Our calculations suggest that nearly the entire Ebitda (earnings before interest, tax, depreciation and amortization) productivity differential is accounted for by the roughly 16% lower realization for the company despite having a higher onsite mix.” Mahindra Satyam will also give salary hikes effective October 2011, which will affect margins.
Having said that, there’s little doubt that the rise in margins has been much quicker than what many analysts had anticipated and will, without doubt, result in earnings upgrades. This is also evident from the 10% rise in the company’s stock price on Wednesday. But to continue to expect similar earnings surprises and upgrades may be asking for too much.
We welcome your comments at marktomarket@livemint.com
Comment E-mail Print Share
First Published: Thu, Aug 11 2011. 12 49 AM IST