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Satyam: Lower other income pares net - Views on News from Equitymaster
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Satyam: Lower other income pares net
Jan 21, 2008

Performance summary
  • Topline grows by 8% QoQ during 3QFY08. Growth led by 9.4% QoQ growth in volumes and 2.3% QoQ improvement in billing rates.

  • Operating margins expands by 1.6% QoQ due to lower costs (as percentage of sales).

  • Bottomline grows by 6% QoQ during the quarter; despite margin expansion, growth in net profits has been curtailed due to lower other income (36% QoQ decline).

  • Adds a little over 3,400 employees and 32 new clients during 3QFY08. Attrition level has declined from 13.9% in 2QFY08 to 13.1% in 3QFY08.

Consolidated financial performance
(Rs m) 2QFY08 3QFY08 Change 9mFY07 9mFY08 Change
Sales 20,317 21,956 8.1% 47,059 60,575 28.7%
Expenditure 16,290 17,244 5.9% 35,784 47,733 33.4%
Operating profit (EBDIT) 4,027 4,712 17.0% 11,275 12,842 13.9%
Operating profit margin (%) 19.8% 21.5%   24.0% 21.2%  
Other income 1,105 705 -36.2% 1,129 2,441 116.2%
Interest 41 81 98.0% 85 155 82.8%
Depreciation 391 423 8.3% 1,131 1,201 6.2%
Profit before tax 4,700 4,913 4.5% 11,188 13,927 24.5%
Tax 609 576 -5.4% 1,078 1,717 59.3%
Minority interest - -   (1) -  
Profit after tax/(loss) 4,091 4,336 6.0% 10,112 12,210 20.8%
Net profit margin (%) 20.1% 19.8%   21.5% 20.2%  
No. of shares (m)         684.7  
Diluted earnings per share (Rs)*         23.6  
P/E ratio (x)*         15.3  
* On a trailing 12-months basis

What has driven performance in 3QFY08?
  • Satyam recorded an 8% QoQ growth in topline for 3QFY08 driven by 9.4% QoQ growth in volumes and 2.3% improvement in billing rates. The company has guided for a 29% YoY growth in topline in rupee terms and 19% YoY growth in EPS (we estimate growth to be 32% and 25% respectively). Growth in dollar terms is estimated at 45% YoY in topline and 40% YoY in EPS. The difference is wide mainly because of the appreciating rupee. Satyam BPO clocked revenues of over US$ 15 m in 3QFY08 and the company has maintained its revenue guidance for this business at US$ 61 m for FY08. The company has added a little over 3,400 employees and 32 new clients during the quarter. The attrition level also fell from 13.9% in 2QFY08 to 13.1% in 3QFY08.

    Revenue break-up by service offerings
      2QFY08 3QFY08  
      Rs m % of total Rs m % of total Change
    Application development and maintenance 8,919 44% 9,665 44% 8%
    Consulting and Enterprise Business Solution 9,151 45% 9,889 45% 8%
    Extended Engineering Solutions 1,327 7% 1,500 7% 13%
    Infrastructure Management 920 5% 902 4% -2%
    Total revenues 20,317 100% 21,956 100% 8%

  • Satyam’s operating margins expanded by 1.6% QoQ. This was mainly due to lower costs (as percentage of sales). While the S,G&A have remained stable (16% of sales), the staff costs have come down from 64.2% in 2QFY08 to 62.9% in this quarter which aided the margin expansion. The higher staff costs in last quarter were mainly due to annual wage hikes affected.

    Revenue by Industry vertical
      2QFY08 3QFY08  
      Rs m % of total Rs m % of total Change
    Insurance, Banking and Financial services 4,838 24% 4,918 22% 2%
    Manufacturing 4,821 24% 5,098 23% 6%
    TIMES 4,779 24% 5,065 23% 6%
    Healthcare and Pharma 1,613 8% 1,761 8% 9%
    Retail, Transportation & Logistics 1,520 7% 2,005 9% 32%
    Others 2,747 14% 3,109 14% 13%
    Total 20,317 100% 21,956 100% 8%

  • Satyam recorded 6% QoQ growth in bottomline during 3QFY08, which was pared largely due to lower other income. Other income declined by 36% QoQ. While tax expenses declined by 5% QoQ, it was unable to mitigate the impact of lower other income.

What to expect?
At the current price of Rs 333, the stock is trading at a multiple of 9.7 times our estimated FY10 earnings. Satyam has reported a decent performance both on volume as well as pricing front. Importantly, the company has been able to grow its volumes as well as pricing for the third successive quarter better than the big three (TCS, Infosys and Wipro). The only negative was the lower other income which impacted the bottomline. At these levels, while the stock seems attracive, we advice you to practice caution given the management's track record and availability of better stocks from the sector at equally attractive values.

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