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Tech Mahindra: British Telecom keeps it going - Outside View
 
 
Tech Mahindra: British Telecom keeps it going

Tech Mahindra on a roll?

The Tech Mahindra management trumpets its achievements in no small measure, using the pages of the annual report to list out its achievements. Not including some self induced back handed compliments for added measure. The top management is so well remunerated you see that they have to justify their emoluments. The meandering list of lucid tech laced accomplishments is utterly incomprehensible to the uninitiated. The company reckons that this is the way forward to zap its shareholders, who come from all walks of life. Among the few comprehensible statements, is the one on it being ranked by Nasscom as the 5th largest Indian IT services company in terms of export revenues. It has also been anointed as the number one company in telecom services in India by Voice and Data magazine.

The BT link & now Satyam

From the minority shareholder point of view, its only achievement since the public issue is to flatter to deceive. While the shares of every other large IT services company is on the constant uptick, Tech Mahindra's share price has flip flopped like an out of focus yo-yo. To add to its enigma, it even got rid of its blue chip brand name British Telecom (BT) from its logo. (BT by all accounts is still the second largest shareholder in Tech Mahindra after M&M, with an equity stake of close to 31%). The need to drop BT from its logo appears all the more incomprehensible, as close to 50% of its revenue for FY10, or Rs 22 bn accrued, care-of the good offices of BT. This could also well be the main reason, why its pre-tax profit margins are far below that of the top gun IT product software companies. It has to make do with lower margins on deals with the Big Boss. And now, Tech Mahindra has to manage brand Satyam instead. Ever since its acquisition of Satyam, investors in Tech Mahindra have preferred to err on the side of caution. The point is that, no one can forecast, even with any reasonable degree of inaccuracy, what the restated accounts will unveil, as the previous management may have picked it clean more clinically, than say a vulture will do with a carcass.

But the fact of the matter also is that Satyam is still up and about and raring to go. This is proof indeed that inspite of the prevarications of the previous management, the company's brand equity is still intact, and financially upright to boot. If anything, the investigations should finally reveal the extent of the money that is due to the company, rather than due from it. Satyam's brand comes from its personnel, and its IT knowledge base and these assets has not been doctored.

The telecom IT top gun?

The company which claims to be on cloud nine in the telecom IT space is barely cruising along if the results of the latest completed financial year is anything to go by. It just about eked out a 3% increase in revenues to Rs 44.8 bn. This is indeed surprising, as the directors' in the report on ‘management discussion and analysis' gives a resounding thumbs up to the future of this industry. No reasons are attributed on why the company could not make a more significant headway in the market during the year gone by. Not surprisingly the vast bulk of its revenues accrue from the Western hemisphere. The only difference here, as compared to its IT service provider brethren, is that 59% of the revenues come from Europe (thanks be to BT), with Americas (29%), and the Rest of the World chipping in with the balance 12%. The obvious inference here is that the company has not been able to cut much ice with other large telephony service providers, despite the BT connection.

Bottom-line under strain

With the bottom-line under strain, it was ‘other income' amounting to Rs 909 m (helped by favorable exchange rates) which gave a leg up to the bottom-line. In the preceding year other income was splashed deep in the red, due to unfavorable exchange rates. The turnaround in other income works out to a neat Rs 1.3 bn. Pretax profits were hit by a slam dunk, arising from the finance charges that it had to incur (for the first time), as the company had to borrow, to the tune of Rs 13.7 bn to part fund the equity stake of 43% in Satyam.

Tech Mahindra acquired the shares through its wholly owned subsidiary Venturbay Consultants into which it pumped in Rs 30.5 bn as equity capital for this purpose. (The startling aspect of this equity infusion into Venturbay is that the 30.5 m shares of Venturbay of Rs 10 each, and a newly promoted company at that, were acquired at the rate of Rs 999.63 per share!). The Satyam shares were acquired at Rs 58.90 per share which is way below the current ruling price for the share. The cash that it generates from operations will more than suffice to pay off this debt in the current year, if the company chooses to do so.

The BT quirk

Tech Mahindra appears to have a very discomforting, and a ‘guru shishya' relationship of sorts with British Telecom. The company is either advancing large sums of money to BT for getting future contracts, or, BT in turn is tossing over large sums to Tech Mahindra as advance for contract work. In one of its footnotes it merely states that a customer (presumably to be read as BT) has restructured long term contracts with the company from April 1, 2009 involving changes in all contract terms. As per the amended contracts, the customer has paid restructuring fees of Rs 9.7 bn. An amount of Rs 2 bn from this is being recognized as revenue for the year FY10, and the balance is carried forward as deferred revenue. What is one to make of all this please? What is the deal here? And, why does it resort to this cloak and dagger method of going about revealing material information to its shareholders?

The subsidiary route

In an effort to spread its footprint into foreign shores, Tech Mahindra has 12 software subsidiaries across several continents. Two of these were acquired by the company while the rest were engineered by the mother hen herself. Tech Mahindra also subcontracts some of its software development work to 3 of its overseas subsidiaries. But barring the American subsidiary, which is the company's biggest subcontractor, the others are mere pawns in the game as yet, in terms of revenue generation. They will obviously take time to get into the right groove. The American subsidiary for the matter of record rang up revenues of Rs 4.1 bn. What is also common to all of them barring CanvasM Technologies, is that they all have very miniscule paid up capitals - which makes one wonder how serious Tech Mahindra is as yet about their role in its well being.

Thankfully, all the subsidiaries are also making a profit of sorts, as is the German subsidiary. Inexplicably though, Tech Mahindra continues with a provision of Rs 354 m towards the diminution in the value of its investment in its German subsidiary, even though the German subsidiary is now solvent, at least from the reserves point of view. It would help if the parent gave at least a bird's eye view of what it has in store for its siblings in the foreseeable future. Obviously there is a game plan, hence their incorporation.

Not adding up

Collectively these subsidiaries rang up a turnover of Rs 8.9 bn, and posted a negative pre-tax bottom-line of Rs 218 m and a post tax negative of Rs 342 m. The overall negative post tax was only because of the loss sustained by Venturbay Consultants. But the consolidated statement of the group gives a different set of numbers, when these figures are aggregated with that of the parent. Even the paid up capital of Venturbay Consultants is shown as Rs 304 m in the subsidiary statements, when the parent has actually invested Rs 3.5 bn in Venturbay's equity capital. Venturbay is also shown as having reserves of Rs 30.1 bn - which could well aver to the share premium reserves! There are several other such entries in the subsidiary statements which appear to be at odds with the figures shown in the parent's balance sheet. But such are the indefatigable of the world, and it makes no sense to try and change its working.

Disclosure: Please note that I am a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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