Tech Mahindra + Satyam – Uncertainity for one more Quarter

Highlights of the call

• Satyam Computer has seen 30-35% client erosion. Both the Companies: Satyam Computer and Tech Mahindra would be working separately and merger would happen only after 2 years. There would be changes in the Satyam management soon. The funding of Satyam Computer has been done thru debt and cash. The Company has raised debt of Rs 2000 crore with average interest cost of 11%. The debt has been raised in Tech Mahindra and SPV. The debt is a combination of long-term debt and bridge loan.

• The management believes that the environment is challenging. The performance of the Company was impacted by GBP depreciation against US dollar with about 50-55% of the revenues comes from GBP. The Company is seeing some positive signs of recovery but the real picture will be seen only after 6 months.

• The management is cautious but the deal flow is good. The large deals are up but number of deals is down.

• The volume dip for the quarter was 2% and pricing dip was 2.5%.

• OPM was down 110bps at 27% on the back of lower volumes, lower realizations and higher SG&A expenses. OPM was benefited by Rs 25 crore on the back of re-alignment of employee benefits. Excluding the benefit OPM would have been at 24.7%.

• The billing in GBP for the quarter was US$ 58 million down from GBP 60 million in the sequential quarter. The Barcelona deal (BTGS) had billing of US$ 19 million (US$ 27 million) against GBP 22 million (US$ 34.9 million). For FY09, Barcelona has contributed GBP 87 million. The management believes that the bottom for traditional BT business has not been reached. It expects uncertainty to continue for one more quarter. For the Barcelona deal, the management expects run-rate of US$ 18-20 million to continue for a while. Revenues from the GBP 350 million deal would begin from Q1FY10.

• There has been huge transformation going on at BTGS leading to projects suspension leading to slowdown in operations.

• The Company has increased the variable portion of pay as a cost control measure.

• The Company is working with 2 large clients in Germany and 1 large client in Netherlands. This is furthering the Company’s focus into Continental Europe.

• The company is working with a large North American customer which forma a significant part of North American business. The last 2 quarters have been flat for this customer.

• Utilization is one of the key drivers for margin expansion. For the quarter, utilization including trainees has improved 300bps at 70%.

• Other Income for the quarter stood at Rs 7.80 crore against loss of Rs 39.70 crore in the sequential quarter. Forex loss was US$ 1 million against US$ 9 million in the sequential quarter, provision write back of Rs 6 crore, refund of service tax of Rs 2 crore and interest/dividend income of Rs 5 crore.

• At the end of March 2009, Tech Mahindra has forward hedges of close to US$ 700 million at Rs 43.63/US$ and GBP 270 million at US$ 1.88/GBP against US$ 720 million and GBP 265 million at the end of sequential quarter.

• The salary costs was down 7% at Rs 449.6 crore on the back of hike of variable pay percentage, dip in headcount, lower number of contract workers and realignment of employee benefits.

• Cash & Cash equivalents stood at Rs 1000 crore.

• The Company has stopped campus hiring. It has made campus offers for 1500 for FY10, the joining of whom has been deferred. There would be offers pending for FY09 as well.

• The number of active clients at the end of the quarter decreased to 108 against 110 at the end of sequential quarter. Out of total clients, 2 clients have contributed more than $ 50 million with 4 clients (4 in sequential quarter) contributing more than US$ 25 million. The contribution of the top client BT has decreased 15.3% contributing 52% (57% in sequential quarter) for the quarter. The top 5 clients contribution decreased 8.3% with contribution down at 78% from 79% and top 10 clients decreased 10% at 83% from 87% in the sequential quarter.

• The Net reduction of manpower during the quarter was at 457 (294 additions in sequential quarter) employees totaling to 24972 employees as on March 31, 2009. There was reduction in headcount in software of 719 and addition of 242 employees in BPO and 20 added in support staff. The onsite-offshore mix as far as revenue generation is concerned was at 39:61 against 40:60 in the sequential quarter. Utilization including trainees improved 300bps at 70%.

• The contribution of BT to revenues was down at 52% against 57% in the sequential quarter, in absolute terms it was down 15.3%. Top 2-5 clients contribution was up at 26% from 22% in sequential quarter and in absolute terms it increased 9.7% and that of top 6-10 clients was down at 6% from 8%.