TechM, Satyam seem to juggle a millstone

After slashing costs and manpower, Mahindra Satyam may have to do an encore to keep the boat afloat.

This, even as parent Tech Mahindra desperately seeks funds to repay the onerous debt it took on to acquire the tainted software company.

Tech Mahindra had borrowed about Rs 2,300 crore to finance the Satyam deal and may be paying around Rs 20 crore per month towards interest.

It has been working on a plan to discharge this expensive debt by borrowing funds from a cheaper source, including institutions.

The Tech Mahindra board had even approved a qualified institutional placement to raise around Rs 1,000 crore. However, it has not been able to proceed with the issue owing to poor response from investors.

“Pricing is a key issue here, particularly in this kind of a market. Irrespective of the performance of Tech Mahindra on a standalone basis, what is important is the way the company tries to bail out Satyam. For now, there is no clarity on what Satyam is doing in terms of stabilising or increasing the revenues. All that we continue hear is some information about either people leaving or people being laid off. On the business front, there is not much information available for the market to assess,” said an analyst tracking Satyam developments.

Tech Mahindra also has to contend with reducing costs in Satyam to maintain the margins, with revenues more or less hitting a wall.

Satyam sources said the company’s revenue run rate is hovering around $100 million (Rs 486 crore at Monday’s exchange rate) per month. It has an employee base of about 25,000 people and around Rs 300 crore goes towards their salaries alone.

“The new management has cut almost every possible corner to save costs, excluding the recent decision to keep about 8,000-10,000 people in a virtual pool at knocked down pay. The only option to further cut cost is by moving more people out,” a senior Satyam official told DNA.

And yet, a key concern is that senior personnel have been leaving Satyam as there is still no clarity on the fate of employees. In the latest movement, the company confirmed on Monday that Keshab Panda, who was heading its US business, has put in his papers.

In a strongly worded note to clients dated July 23, CLSA Asia-Pacific analysts Bhavatosh Vajpayee and Nimish Joshi said assumptions that revenues at Satyam will stabilise and growth will revert to industry averages were “overly simplistic.”

“Key senior management personnel have quit, critical customers are exiting and stabilising operations amid a still challenging economic environment is tougher than envisaged... In this backdrop, we do not believe Satyam can be valued as a going concern just yet and assigning valuation multiples to estimated earnings (without formal financial reports) defies logic,” Vajpayee and Joshi wrote, putting a ‘sell’ recommendation on the company’s stock.

Sources indicate a margin of about 8-10% for Satyam on a revenue base of about $1-1.2 billion this year.

Analysts say Satyam needs an ebitda margin of about 15% for operations to be viable.
“It is a difficult choice for Tech Mahindra to make. Unless the headcount is further reduced, there is no way the company can increase the margins further. For a 15% margin, the situation calls for laying off about 5,000-8,000 people in addition to those put on the virtual pool. But, it is certainly a tough call for Tech Mahindra as they will have to look at billable staff too to get to that number. Any damage to the billable HR has a direct impact on the revenue run rate,” another source said.

Analysts do not see any problem in cutting flab further since the utilisation rate is still at about 68%. “Considering the skill levels of Satyamites, the utilisation rate can be taken up to 75-80% comfortably for better margins,” an analyst said.