Macquarie Research: Mahindra Satyam review

FY10 results declared; wait for 2Q
Event
 Satyam reported its audited FY10 and FY09 results on 29 September. The
company under its new management has restated its annual financials but did
not provide any clarity on current business momentum and the key
operational stats exiting 4Q FY10. Top line of US$1.1bn was in line with street
estimate but EBITDA margins of 8% were lower than consensus expectation
of ~12%.. The stock’s ADR was down 11% following the declaration of these
financials. (See Fig 3 and 4 for P&L and balance sheet)
Impact
 FY10 - below expectation. Key negative surprise for the investors in this
result was muted profitability and low headcount base for the company. Since
client account ramp-downs for the company took place in 2H FY10, investor
expectations for FY11 and FY12 would be revised downwards.
 Clarity to emerge post quarterly results due by 15 Nov. Business activity
in the company through FY10 was in a flux following disclosure of the financial
scam in January 2009. As a result, annual FY10 results do not provide
enough clarity on underlying business trends. On the earnings call hosted to
discuss the results, management deferred the questions on current business
run-rate. Satyam would provide an update on its operational performance only
after declaration of its 1Q and 2Q FY11 results on or around 15 Nov. 2010.
 Enterprise Applications Services – ‘crown jewel’ for the company.
Satyam had a strong Enterprise Application Services offering prior to its
credentials being hit by the financial scam. Our conversation with business
managers revealed that Satyam has done 30+ implementations of cloud
offerings for providers like salesforce.com.
Outlook
 Satyam – sixth-largest Indian IT vendor. Figure 2 below compares Satyam
with other leading Indian IT vendors on key parameters like revenues, margin
profile, and employee count.