From zero to hero: Is Mahindra Satyam the next Cognizant?

What a turnaround for a company that not too long ago was at the heart of one of India’s biggest corporate fraud scandals.

On Thursday, the 10-fold increase in net profit to Rs 238 crore for the September-ending quarter from a year ago reported by Mahindra Satyam blew all market estimates out of the water - and delighted investors. Growth was aided by strong demand for outsourcing services and a sharp depreciation in the rupee. On a sequential basis also, net profit advanced by 5.77 percent.

Revenues, meanwhile, shot up by 27 percent from a year ago.

Investors showed their appreciation by pushing up the company’s shares 4 percent on Friday, even as the Sensex plunged 200 points over disappointment over poor industrial production data for September.

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[caption id=“attachment_129026” align=“alignleft” width=“380” caption=“Anand Mahindra, Chairman of Tech Mahindra, and Vineet Nayyar (R), Chairman, Mahindra Saytam. Reuters”]  [/caption]

“Our growth momentum continues for the fifth consecutive quarter. As we come towards the end of our three-year transformation journey, it is indeed satisfying to see that all our key business performance indicators such as growth, profitability and talent retention, are on course. We have shown significant improvement quarter on quarter, in spite of an uncertain macro-economic environment”, said Vineet Nayyar, chairman, Mahindra Saytam, according to a release.

It was surely a day to remember for the company, which had earlier been badly scarred by an accounting fraud perpetuated by founder Ramalinga Raju .

In 2009, Ramalinga Raju made that now-famous statement: “It was like riding a tiger, not knowing how to get off without being eaten”, as he explained how the size of the fraud built up over the years. Accused of fudging the books and overstating the company’s assets for years, both, Ramalinga Raju and Rama Raju, were granted bail last week .

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In the aftermath of the scam, Satyam Computer Services (as it was called then) was taken over by Tech Mahindra, which made the highest bid for the company - Rs 58 per share, after it beat other companies like Larsen and Toubro (L&T) and private equity firm WL Ross and Co.

Under the new management, the company certainly seems to be on a strong foothold.

Speaking to the media after the results, company officials said they are hopeful of a merger with Tech Mahindra, which owns 42.7 percent in Mahindra Satyam, some time in the second half of next year.

They also said the global uncertainty was prompting a slowdown in decision-making for large projects, especially from Europe. However, the company does not expect to face any pricing pressure or margin contractions, according to a report in Business Standard.The company also expects robust demand from financial services and the aerospace/defence sector.

It added 650 employees in the September-quarter and expect to hire more in the next six months.The attrition rate has also come down sharply- to 15.6 percent from 17 percent the earlier quarter. Both are good signs in terms of operations.

Mahindra Satyam added 36 new customers during the quarter, which included three Fortune 500 companies. While these new clients did not included any returning clients (those which were lost during 2009-10), it clearly indicates increasing traction of the company with new clients, besides improved growth with top clients, RBS, an international brokerage, said in a note.The brokerage re-iterates its ‘buy’ rating on the company with target price of Rs 86 per share. The stock is currently trading at Rs 76 per share.

At the media conference, Nayyar said the company was ready to give the competition “a run for its money.” With a bit of luck, it probably will.

Indeed, with a very hefty dose of good luck, it could become the next Cognizant. That US-based company beat Wipro earlier this year to become the third-biggest IT services company, primarily because of its super-aggressive growth. Now Cognizant seems to be inching closer to beating even revered Infosys.

Is Mahindra Satyam the next dark horse of the Indian IT industry?