Tech Mahindra and Satyam to run independently for 2 years

(By Anthony Miller – Monday, 27th April 2009 4:45pm). Satyam is to continue to run as a separate company for two years before its operations are integrated with those of Tech Mahindra. On the Q4 concall this afternoon, management also advised that the forensic audit of Satyam’s accounts is complete, although the restated accounts may not be ready until the end of the year. However, management changes in Satyam’s UK and European operations are likely to be announced in the next few weeks.

Tech Mahindra CEO, Vineet Nayyar, also confirmed that Satyam had lost 30-35% of its clients since the Raju scandal broke, though didn’t say what the starting point was and which ones went. In their last published financial results for the Sept. ’08 quarter, Satyam reported 649 active clients, though how many of those were figments of Raju’s accounting ‘practices’ are unknown. Satyam’s customer base had a pretty long ‘tail’; about 30% of revenues came from its top 10 clients.

It was also clear that Satyam is losing money, though management was hopeful it would return to profit “very, very soon”. Cost cutting will be concentrated on the back office, but front-line redundancies were not ruled out. In any event, Satyam has ceased campus hiring and the 5,000 or so graduates with existing job offers will find it a pretty long wait before they start work – if at all.

As for Tech Mahindra’s number one client (and investor), revenues from BT dropped again from £60m in Q3 to £58m. Both ‘core’ BT services and last year’s £500m/5 year ‘Barcelona’ contract were hit by the well documented problems in BT Global Services. BT now generates 52% of Tech Mahindra’s revenues, down from 65% a year ago. In contrast to Satyam, Tech Mahindra’s customer base is highly concentrated; of the 108 clients in total, the top 10 account for 84% of revenues.

Tech Mahindra’s European body-shop operation, Tech Talenta (see Tech Mahindra launches European body-shop business) seems to have been primarily set up as a means for clients to consolidate their IT contractors to one vendor (i.e. Tech Mahindra) as a prelude to switching to fixed price contracts and/or offshoring. The business doesn’t have a salesforce per se, and staffing numbers appear to have declined from 500 at launch to some 350. Sounds like a good marketing ploy to me.

For the record, Tech Mahindra finished its FY with revenues of $985m, 5% up yoy. The 9% sequential decline in Q4 revenues (to $212m) had the unfortunate effect of pushing Tech Mahindra below the ‘magic’ $1bn trailing 12 month run rate which it first passed a couple of quarters ago. Margins in the quarter dropped 10bps to 26.9%, though this was over 5% up yoy.

I’m still hoping to get some insight into the current state of Satyam’s local operations, and will let you know as and when.