When Satyam Computer Services Ltd (Mahindra Satyam) had reported results for the December quarter earlier this year, its shares had jumped 12%, even though revenue growth was average at 3% and operating profit margin had risen by just 0.5 percentage point compared with the preceding quarter. The reason was that the company’s shares had underperformed in the run-up to the results.

With the March quarter results, things worked out exactly the opposite. The company’s operating results were far better than expected. Revenue grew by 7.5%, which is higher than what the top performing firms in the sector achieved in the March quarter. What’s more, operating margin rose by 6.6 percentage points, leading to a 118% jump in earnings before interest, tax, depreciation and amortization compared with the December quarter.

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Still, shares of the company fell by about 4%, thanks to the fact that they had outperformed in the past few months. Since the current results season began in mid-April, the CNX IT (information technology) Index of the National Stock Exchange has declined by about 7%, while Satyam’s shares were more or less flat.

In the past three months, the company’s shares have risen by about 16%, while the IT index has been flat. It’s largely because of this outperformance ahead of the results announcement that investors didn’t get excited about the better-than-expected financials for the quarter.

Besides, there are some doubts about the sustainability of the margins reported by the company last quarter. While revenue grew by 7.5%, the underlying volume growth was only 3.5%. The rest of the increase was on account of currency-related gains (1.6%) and the balance was on account of efficiency-related gains on the company’s fixed-price projects.

Analysts were assuming that the large difference between volume growth and revenue growth would at least partly be explained by an increase in billing rates. But the company has said that pricing was flat. Also, the traditional understanding is that efficiency gains on fixed-priced projects would result in higher margins, rather than boosting revenue. According to the company, however, this contributed to about a 2 percentage points increase in revenue growth, leading to doubts about its sustainability.

Be that as it may, analysts are still expected to increase their earnings estimates for the company. They were expecting Mahindra Satyam to return to double-digit margins only in fiscal 2011-12. The fact that the company has settled most of the legal cases against it is also a big positive.

But as investors’ reaction showed on Monday, this may not result in a rally in the company’s shares, since valuations have already run up. Also, Mahindra Satyam still has to prove that it can sustain this performance over a longer time frame.

Graphic by Yogesh Kumar/Mint

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