Is Mahindra Satyam primed for a turnaround?

In early 2009, India underwent its own version of the Enron accounting scandal, with Satyam Computer Services, at the time that country’s fourth-largest information technology company as measured by market capitalization, at its heart Its founder and chairman, Ramalinga Raju was arrested on charges of embezzlement, and the company teetered on the verge of declaring bankruptcy. (Raju is on bail and awaiting trial in India.) That’s when the Mahindra group, a large Indian conglomerate, came to the rescue, buying Satyam in November 2011, after which it was renamed and rebranded as Mahindra Satyam (SATY.NS). The company confronted tremendous skepticism: existing customers fled, while new business was hard to come by. Finally, three years later, analysts finally are raising their earnings estimates for this company again. Mahindra Satyam has a positive Predicted Surprise of 6.8%, and the StarMine research team sees data showing that the company is likely to beat estimates when it reports its annual financial results on May 23, 2012.

Mahindra Satyam is an IT services company that provides global clients with enterprise solutions. A majority of its clients are international and contracts are primarily dollar denominated, so as the Indian rupee weakens against the dollar and other major currencies, analysts expect the earnings (which are reported in rupees) to improve. The chart below from Datastream shows how the Indian rupee fared against major currencies. In the period between July and December of 2011 (shaded in blue), the rupee weakened dramatically; although it has recovered some ground in recent months, the rupee remains significantly weaker compared to the euro, the British pound or the US dollar than it was a year ago. Bad news for the rupee is good news for Mahindra Satyam’s bottom line, however, making each overseas contract more valuable in rupee terms. This, analysts say, is one reason they expect stronger earnings for the company and are starting to revise their estimates upwards.

Another reason for optimism, analysts say, is that the company’s customer base is stabilizing at last, after two years of uncertainty. That may mean that revenues stop shrinking. Both would be good signs for the beleaguered company, hoping to rebuild its reputation.

The chart below shows that while analysts have been raising their estimates for the company for the last 12 months, the I/B/E/S consensus (represented by the gold line) still falls below the SmartEstimate. While the consensus now predicts the company will report earnings of 7.96 rupees per share, that is below the SmartEstimate (represented by the blue line, below) of 8.50 rupees. That is a signal that the consensus estimate may still be too low. In fact, the StarMine Analyst Revisions Model (ARM) score of 99 places Mahindra Satyam firmly in the top decile of companies in the region. Such a high score signals that analysts probably will remain bullish and continue to raise earnings estimates for the company. Not surprisingly, the company reported a blowout third quarter when it announced its results on February 1, 2012; you can read more about that earnings performance greater detail in this Reuters article.

To be sure, the company still hasn’t escaped the shadows of recent events. Mahindra Satyam still has legal issues to resolve (tax authorities argue that Satyam owes them a hefty amount in overdue income taxes; the company disputes the size of the amount owing) but as it continues to rebuild and as revenues stabilize, analysts may become even more bullish on the company. The key question revolves around its ability to attract new customers in 2012, as it competes with industry heavyweights like Infosys, TCS and Wipro. But for the time being, the signals point to another strong quarter when the company wraps up its fiscal year at the end of March.

Learn more about how StarMine analytics can help you pinpoint critical developments in your portfolio or watch list. Request a free trial today.