One of the risks involved in investing in shares of Mahindra Satyam was the possibility that the company would have to pay a large amount to settle claims in the US. But gradually, this risk has all but disappeared. The company has pursued out-of-court settlements to clear its legal hurdles, which has led to considerably lower payouts.
Mahindra Satyam announced this week that it has agreed to pay the US Securities and Exchange Commission $10 million (around Rs 44 crore today) to settle charges that it engaged in an accounting fraud. Less than two months ago, it had settled a class action suit for $12.5 million. And last year, it agreed to pay Upaid Systems Ltd $70 million to settle a patent lawsuit. The latter two cases were a major concern for Mahindra Satyam’s investors.
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While there’s another class action suit pending in the US, analysts don’t foresee any nasty surprise ahead. No wonder, the company’s shares have enjoyed a re-rating in the past two months or so. Mahindra Satyam’s shares have risen by 36% since 11 February, at a time when the National Stock Exchange’s CNX IT Index has risen by around 8% only.
Apart from clearing of major legal hurdles, investors were also enthused by the company’s results for the December quarter. The company reported an 11% sequential growth in earnings before interest, tax, depreciation and amortization last quarter. But, as pointed in this column earlier, it’s premature to come to the conclusion that the company’s fortunes have changed.
A turnaround, according to some analysts, is an uphill task. Sandeep Muthangi at IIFL Capital Pte Ltd wrote to clients last month that Mahindra Satyam has faced severe erosion in its pricing. He notes that while the company’s employee base is 63% higher than that of Patni Computer Systems Ltd, its revenue is only about 53% higher. Based on this, Mahindra Satyam’s per employee realization is roughly 10% lower than that of Patni, despite the fact that it has a higher proportion of onsite work and a lower proportion of low-priced service lines such as BPO (business process outsourcing). Muthangi says, “As such, the poor pricing, we believe, is due to an erosion on multiple counts—price cuts, client exits, fall in high-end offerings, etc.” Besides, employee attrition continues to be a worry.
Improving pricing seems to be the key to a sustained improvement in Mahindra Satyam’s financial performance. Needless to say, with the settling of most legal cases, the major obstacles to the merger with Tech Mahindra Ltd have been cleared. While this in itself is positive, investors must note that the merger ratio will not necessarily be in their favour. For the gain in the shares to sustain, it’s imperative that Mahindra Satyam’s fortunes truly improve.
Graphic by Paras Jain/Mint
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