In end-September, when Mahindra Satyam reported results for the fiscal years ended March 2009 and March 2010, analysts were disappointed that the company didn’t share quarterly results. Well, the wait has ended, with the company now sharing latest reports for the June quarter and the September quarter of the current year. While analysts have got what they wanted, what they saw in the reports isn’t what they expected. According to one analyst from a foreign brokerage, Satyam’s earnings in the first half of the current year are lower than the most pessimistic estimates on the Street. He adds that his estimate of earnings per share (EPS) of 4 for the current fiscal year is among the lowest on the Street, but that Satyam may not even achieve that considering that it has managed an EPS of only 1 in the first half of the year.

The company’s quarterly revenue run-rate is around $270 million (around 1,220 crore today), lower than the run-rate of $290 million in FY10. But that isn’t surprising since revenue was higher in the first half of the previous fiscal, since when some clients have exited. Even if the company manages to grow revenue by 5% each quarter in the next two quarters, it will still finish the year with a year-on-year revenue decline of about 6%.

Ebit (earnings before interest and tax) margins stood at 5% in the June quarter and at 2.5% in the September quarter. Margins fell further last quarter owing to salary hikes. These are abysmally low margins for an information technology services firm and it seems like a long haul before profitability returns to normal.

One could argue that the above analysis doesn’t take into account the fact that Satyam is still in a recovery phase, having just come out of a major scam and crisis of confidence. As Vineet Nayyar, chairman of Mahindra Satyam, says, “Satyam should be viewed as a patient, which has spent almost a year under intensive care. It hasn’t yet reached its full strength and is still convalescing…"

The problem is that Satyam’s valuations reflect a much rosier view of the company. At 84 per share, it trades at 10-11 times aggressive earnings estimates for FY12. The bullish view ignores ground realities and the struggle the company is likely to face in retaining employees and clients in an environment where attrition is high and top-tier firms are gaining market share at the expense of tier II and smaller firms.

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