Satyam does well; merger to restrict gains for shareholders

Satyam Computer Services Ltd (Mahindra Satyam) announced spectacular results for the June quarter. Revenue grew 4.6% in constant currency terms to $348 million and operating profit margin jumped 4.2 percentage points to 21.7%. Operating profit of Rs 407.5 crore was way ahead of analysts’ estimates. Some of the growth in revenue was contributed by an acquisition the firm made earlier in the year. But, even excluding the acquisition, revenue grew 4%. On margins, the firm didn’t have to contend with some of the year-end adjustments it undertook in the March quarter. Even so, the jump in profit came as a positive surprise. Strangely though, Satyam’s shareholders won’t be able to fully reap the benefits of their firm’s performance. The firm is set to merge with Tech Mahindra Ltd and the merger ratio has already been set at 8.5 shares of Satyam for every share of Tech Mahindra. Satyam’s value, therefore, depends not only on its own performance, but also on that of the parent firm, which has been languishing because of its sole focus on the troubled telecom sector.

It’s not without reason that some of Satyam’s minority investors were disgruntled about the swap ratio they were offered. Their company’s latest results do give the impression that the ratio could have been a bit more favourable to Satyam shareholders. Tech Mahindra will report its quarterly performance on 9 August; analysts expect revenue to be flat, while margins are expected to rise thanks to the rupee’s sharp depreciation.

In Satyam’s case, margins rose because of the depreciation in the rupee as well as due to operational efficiencies. The weaker rupee added around 3 percentage points to margins, while the balance came from improvement in employee utilization, benefits of a wider employee pyramid (having a greater proportion of employees with low experience), and savings on selling and administrative expenses. The other highlight of the quarter was the continued drop in employee attrition to 13.5% from as high as 22% a little over a year ago.

The company also managed to put another legal hurdle behind it by settling with Aberdeen Claims Administration Inc. for $12 million. Aberdeen had alleged that the losses suffered by the 20 investors it represented were more than $68 million.

Of course, it remains to be seen if Satyam’s operational performance can be sustained. Even so, the improvement in the company’s performance in the past three years has been impressive. Even without the benefits of the rupee depreciation last quarter, margins are at decent levels of around 19% and compare well with peers.

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