Mahindra Satyam :: Management Meet Note --, ICICI Securities,

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We met the management of Mahindra Satyam to understand demand
trends and execution strategy, going forward. Incorporated in 1987 by the
two Raju brothers, Satyam Computers was the fourth largest Indian IT
company till Q2FY09 with ~53,000 employees and revenues in excess of
$2 billion, providing services to global 2000 companies. The company’s
historical focus has been manufacturing and package implementation
services, thanks to its relationship with SAP. Mahindra group acquired
Satyam in April 2009 after the erstwhile founders reported financial
irregularities in January 2009. The key takeaways are highlighted below.
Revenue growth, EBIT margin pressures get alleviated
In Q4FY11, Mahindra Satyam’s revenues grew 7.5% QoQ to | 1,375 crore
while EBIT margins before exceptional items stood at 9.7% vs. 2.5% in
Q2FY11. For the full year FY11, the company reported EBIT margins of
5.3%. The demand pick-up in the fourth quarter is notable considering
that the company would not have likely participated in >$50 million total
contract value (TCV) deals in the first half of FY11. Finally, with the client
roster stabilising at ~230, we believe the new management has laid the
foundation, of rebuilding the company, in the first two years of its threeyear
resurrection strategy.
Improvement in employee pyramid may yield EBIT margins expansion
Analysing the current employee pyramid at Mahindra Satyam suggests
that the company has 20% of its workforce in the 0-3 year band, 34% in 3-
6 years, 25% in 6-10 years and the remaining 21% in >10 years. As a rule
of thumb, freshers (0-3 year experience) constitute 40-50% of the
workforce and employee costs accounts for ~55-65% of revenues,
depending on the operating model. The anomaly at Mahindra Satyam can
largely be attributed to minimal fresher hiring during the two year
rebuilding process. However, hiring of ~17,000 freshers in the next three
years could flatten the employee pyramid leading to cost rationalisation,
yielding meaningful improvements in EBIT margins.
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Mahindra Satyam is currently trading at 1.9x on the Mcap/FY11 sales
metric vs. 4-6x for Tier-1 Indian IT companies. With a majority of class
action lawsuits settled and the organisation rebuilding process almost
complete, we believe, management focus should shift to achieving
industry comparable revenue and earnings growth, resulting in a re-rating
of the stock.