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Satyam: Meets expectations

Apr 24, 2002

Satyam has reported a 4% sequential decline in net profits for FY02. The company has posted a 5% sequential growth in revenues. This translates to a YoY growth of 3% in net profit and a rise of 18% in topline. While the net profit numbers are marginally above market expectations, the revenue growth is way ahead of market estimates.

(Rs m) 3QFY02 4QFY02 Change FY01 FY02 Change
Sales 4,358 4,577 5.0% 12,200 17,319 42.0%
Other Income 102 249 143.4% 217 712 228.1%
Expenditure 2,908 3,176 9.2% 7,750 11,508 48.5%
Operating Profit (EBDIT) 1,450 1,401 -3.4% 4,450 5,812 30.6%
Operating Profit Margin (%) 33.3% 30.6% 36.5% 33.6%
Interest 5 3 -38.1% 345 96 -72.2%
Depreciation 306 346 12.8% 965 1,175 21.8%
Profit before Tax 1,241 1,301 4.8% 3,357 5,253 56.4%
Extraordinary income/(expense) - (408) 1701 (408) -124.0%
Tax 47 149 217.4% 196 351 79.5%
Profit after Tax/(Loss) 1,194 744 -37.7% 4,863 4,494 -7.6%
Net profit margin (%) 27.4% 16.3% 39.9% 25.9%
Diluted number of shares 314.5 314.5 314.5 314.5
Diluted Earnings per share* 15.2 9.5 15.5 14.3
P/E (x) 28.3 18.8
*(annualised)

However, the company has incurred an extra-ordinary expense of Rs 408 m in 4QFY02. Considering the extra-ordinary expense, 4QFY02 net profits have declined 38% sequentially. On a YoY basis, this translates to a drop of 33%.

The company has initiated work to close down its wholly owned subsidiaries Satyam Europe Limited, Satyam Asia Pro. Limited and Satyam Japan KK. The existing business of the subsidiaries is being transferred to the parent company. The extra-ordinary write off Rs 407 m has been provided for investments and the non-recoverable trade and other receivables. While this is a positive step considering the fact that the company is now cleaning its books, shareholders will have to bear the brunt of the managementís adventures.

For the full year FY02, the company has reported a 55% rise in net profits and a 42% growth in revenues. This is the highest amongst the software majors. The net profit growth does not include the extra-ordinary expense of Rs 408 m in FY02 and the extra-ordinary income of Rs 1,701 m in FY01. After considering extra-ordinary items for both the years, net profits have declined by 8%.

RECONCILIATION BETWEEN INDIAN GAAP AND US GAAP
(Rs m) 3QFY02 4QFY02 Change FY01 FY02 Change
Net profit as per Indian GAAP 1,194 742 -37.8% 5,059 4,577 -9.5%
Deferred Stock Compensation charges (148) (97) -34.3% (2,100) (508) -75.8%
Amortization of Goodwill (51) (51) -0.2% (214) (209) -2.2%
Loss of Susidiaries & Joint Venture (290) (233) -19.7% (2,140) (4,182) 95.4%
Gain on sale of stake in Sify 1,687 - -100.0% (1,780) 1,705 -195.8%
Charge off for put options in TRW (279) (276) -1.0% (128) (492) 285.8%
Others (14) 51 (23) (42) 86.8%
Provision not required under US GAAP - 407 - 407
Total US GAAP Adjustments 905 (200) -122.1% (6,384) (3,321) -48.0%
Net Income as per US GAAP 2,099 542 -74.2% (1,326) 1,256

Based on the numbers reported as per US GAAP, Satyam reported a net profit of Rs 1,256 for FY02. This was due to sharp decline in deferred stock compensation expenses. However, the losses on account of subsidiaries also grew by 95%. For 4QFY02, the losses on account of subsidiaries declined by 20% sequentially.

The companyís bottomline growth for FY02 has been higher than the growth in revenues due to a significant other income component and steep decline in interest costs.

Satyam expects the topline to grow by 21% to 23% in FY03. The rise in net profits is expected to be in the range of 20% to 22%. The company has factored in a further decline in operating margins and expects operating margins for FY03 to be around 32%.

At the current market price of Rs 267, the stock is trading at a P/E multiple of 18x its 4QFY02 annualised earnings. The managementís outlook being in line with others from the sector itís likely to keep the stock price range bound in the near future. However, the sale of stake in Sify could be a trigger for the stock price. Considering the fact that its valuations are the lowest among the software majors, the stock price could witness swift improvement by the end of the fiscal.

However, before considering the stock as an investment option, the investors need to reckon that the management has written off Rs 407 m in 4QFY02 due to investment in subsidiaries. Previously Rs 1,219 m (US$ 26 m) was written off from Sifyís books as provision for decrease in value of investments in Indianworld.com and Cricinfo.com in FY01. Another write off was made in 2QFY02, which amounted to Rs 5,296 m (US$ 110 m). In FY01 and FY02, Satyam has written off nearly Rs 7 bn (US$ 143 m). Moves like this will not help stakeholders, no matter how brilliantly the company performs.


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