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Satyam: One up on peers - Views on News from Equitymaster
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Satyam: One up on peers
Apr 21, 2008

Performance summary
  • Topline grows by 31% YoY during FY08, 10% QoQ during 4QFY08. Full year sales higher by 3% as compared to our estimates.
  • Operating margins contract by 2% YoY during the fiscal, largely on account of the impact of rupee’s 11% YoY appreciation against the US dollar.

  • Net profits grow by 20% YoY during the fiscal, 8% QoQ during the fourth quarter. EPS higher by just about 1% as compared to our estimates.

  • Management estimates FY09 revenue to grow by 24% to 26% YoY; net profits estimated to grow between 17% and 19% YoY.

  • Recommends final dividend of Rs 2.5 per share (dividend yield of 0.5%).

Consolidated financial performance
(Rs m) 3QFY08 4QFY08 Change FY07 FY08 Change
Sales 21,956 24,160 10.0% 64,851 84,735 30.7%
Expenditure 17,244 18,654 8.2% 49,474 66,387 34.2%
Operating profit (EBDIT) 4,712 5,507 16.9% 15,377 18,348 19.3%
Operating profit margin (%) 21.5% 22.8%   23.7% 21.7%  
Other income 705 230 -67.4% 1,833 2,672 45.8%
Interest 81 46 -43.7% 159 202 26.8%
Depreciation 423 435 2.9% 1,484 1,636 10.2%
Profit before tax 4,913 5,255 7.0% 15,566 19,183 23.2%
Tax 576 587 1.8% 1,520 2,304 51.5%
Minority interest - -   (1) -  
Profit after tax/(loss) 4,336 4,669 7.7% 14,047 16,879 20.2%
Net profit margin (%) 19.8% 19.3%   21.7% 19.9%  
No. of shares (m)       667.2 670.5  
Diluted earnings per share (Rs)         25.2  
P/E ratio (x)         18.9  

What has driven performance in FY08?
  • Satyam recorded a strong 31% YoY growth in net sales during FY08. This was a combined result of higher volumes and improved billing rates. As for the latter (billing rates), while these grew 5.4% YoY for onsite work, the improvement for offshore work stood at 4.5% YoY. Improvement in these rates was a consequence of the company increasing the share of high value services in its revenue mix. This is indicated from the higher share of ‘consulting and enterprise business solutions’ services, which moved up to 45% of sales in FY08, from 41% in FY07. Revenues from this segment grew by 42% YoY during FY08. Revenue from the company’s second largest service offering, application development and maintenance, grew by 21% YoY.

    Revenue break-up by service offerings
      FY07 FY08  
      Rs m % of total Rs m % of total Change
    Application development and maintenance 30,778 47% 37,300 44% 21%
    Consulting and Enterprise Business Solution 26,855 41% 38,021 45% 42%
    Extended Engineering Solutions 4,267 7% 5,762 7% 35%
    Infrastructure Management 2,951 5% 3,652 4% 24%
    Total revenues 64,851 100% 84,735 100% 31%

    As regards revenues by business verticals, the TIMES division (Telecom, Infrastructure, Media, Entertainment and Semiconductor) was the lead growth driver, as sales here grew by 43% YoY during FY08. While the manufacturing vertical grew by 15% YoY, the slowdown in the banking and financial services segment was apparent (BFSI) as this segment’s sales grew by just around 11% YoY.

    Revenue by industry vertical
      FY07 FY08  
      Rs m % of total Rs m % of total Change
    Insurance, Banking and Financial services 17,490 27% 19,379 23% 11%
    Manufacturing 17,626 27% 20,328 24% 15%
    TIMES 13,346 21% 19,057 22% 43%
    Healthcare and Pharma 4,812 7% 6,550 8% 36%
    Retail, Transportation & Logistics 3,755 6% 7,118 8% 90%
    Others 7,821 12% 12,304 15% 57%
    Total 64,851 100% 84,735 100% 31%

    Satyam added a net of 1,122 employees during the fourth quarter, thus taking its base to 46,000 employees. The attrition rate came down to just about 13% (from almost 16% at the end of FY07), which is commendable. Importantly, Satyam increased its utilisation rate (offshore including trainees) at a sharp clip during 4QFY08, to 81.8%, from 78.2% in 3QFY08. For the fiscal, the utilisation rate increased to 78%, from 71% in FY07. The company added 32 new clients during the quarter and the number of active clients including subsidiaries now stands at 617.

  • · Satyam recorded a 2% YoY decline in operating margins during FY08. This can mainly be seen as an impact of rupee’s 11% YoY appreciation against the US dollar, which took the sheen off the company’s profitability. The pressure on margins would have been greater but for the decline in onsite share in revenues. This declined from 51.3% in FY07 to 48.2% in FY08. Higher utilisation levels also helped operating margins during the fiscal.

  • Satyam recorded a 20% YoY growth in net profits during FY08, 1% higher than what we had estimated. This growth was largely a result of the strong topline growth (as discussed above) and a 46% YoY rise in other income. Higher other income was on account of a 62% YoY increase in interest income.

What to expect?
At the current price of 475, the stock is trading at a multiple of 14 times our estimated FY10 earnings. The management has estimated FY09 revenue to grow by 24% to 26% YoY. Further, its estimate for net profit growth stands at between 17% and 19% YoY, almost in line with what Infosys’ management has estimated for. Importantly, 4QFY08 has seen Satyam emerge as the best performer among its peers, both in terms of topline and bottomline growth. This is seemingly on account of the fact that the company derives the lowest proportion of revenues from the US markets, which is currently in the midst of a slowdown. The company has also done well to reduce its attrition levels through various employee retention measures like wage hikes, leadership programs and employee stock options, as the management highlighted during the conference call. We shall soon update our research report on the company incorporating FY08 actual results and estimates for FY11.

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