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Satyam: Operation clean-up continues - Views on News from Equitymaster
 
 
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  • Apr 24, 2003

    Satyam: Operation clean-up continues

    Satyam Computers, one of the largest software services companies in the country, has posted poor results for 4QFY03 as well as FY03. The company has posted a net loss in 4QFY03 mainly due to a Rs 1.5 bn charge that it has taken while writing off investments in its subsidiaries like Vision Compass Inc. For FY03, Satyam has posted a 31% drop in profits due to the write-offs, while the topline has registered a growth of 17%. The results look poor even if one does not account for the write-offs, as even then net profits have fallen by 6% in FY03. This in comparison to its peers like Infosys and Wipro who posted growth in net profits in FY03 is poor performance.

    (Rs m) 3QFY03 4QFY03 Change FY02 FY03 Change
    Net Sales 5,223 5,384 3.1% 17,319 20,237 16.8%
    Other Income (8) 150   712 279 -60.9%
    Expenditure 3,628 3,792 4.5% 11,508 14,051 22.1%
    Operating Profit (EBDIT) 1,594 1,592 -0.1% 5,812 6,185 6.4%
    Operating Profit Margin (%) 30.5% 29.6%   33.6% 30.6%  
    Interest 2 2 -1.6% 96 7 -92.5%
    Depreciation 304 312 2.5% 1,175 1,242 5.7%
    Profit before Tax 1,280 1,429 11.6% 5,253 5,215 -0.7%
    Extraordinary items - (1,517)   (408) (1,525)  
    Tax 113 271 139.6% 351 616 75.3%
    Profit after Tax/(Loss) 1,167 (359) -130.8% 4,494 3,074 -31.6%
    Net profit margin (%) 22.4% -6.7%   25.9% 15.2%  
    No. of Shares 314.5 314.5   314.5 314.5  
    Diluted Earnings per share* (Rs) 14.8 -4.6   14.3 9.8  
    P/E Ratio (x)         16.0  
    (* annualised)            

    Fall in the billing rates has adversely impacted the topline growth of Satyam in both 4QFY03 as well as FY03. During the year, the company saw a 22% rise in volumes while realisations have dropped by 7%. This has limited the topline growth in FY03 to just over 16%. While the volume growth looks robust, in comparison to its peers like Infosys and Wipro, Satyam's growth looks muted. In a scenario where the margins of Indian software companies are dropping due to intense price competition, volumes may be the only resurrecting factor and Satyam's inability to match its peers is a cause of concern.

    Service offerings
    (Rs m) FY02 % sales FY03 % sales Change (%)*
    Soft. design and development 9,025 52.1% 9,938 49.1% 10.1%
    Software maintenance 5,135 29.7% 5,385 26.6% 4.9%
    Packaged soft. implementation 2,414 13.9% 4,316 21.3% 78.8%
    Engineering design services 745 4.3% 597 3.0% -19.8%
    Total 17,319 100% 20,237 100% 16.8%
    *FY03 over FY02

    In terms of service offerings the company has made significant progress in increasing its revenues from the package implementation segment. This segment has shown a growth of 76% in FY03., while the core business of software design and development has grown by only 10% albeit on a higher base. Satyam has added 100 new clients in FY03 including 23 from the fortune 500 list indicating quality client acquisitions.

    In terms of industry verticals, Satyam has seen revenues from the healthcare vertical double though on a smaller base. At the same time, the company's presence in the manufacturing sector has fallen by nearly 300 basis points. In terms of the locational mix, Satyam's revenues from the US have remained more or less constant, while revenues from Europe have shown an improvement over FY02. While this may be encouraging, the company's reliance on the US is still too high at 76% of export revenues and the company would do well to reduce this concentration.

    Satyam has seen a nearly 300 basis points erosion in its operating margins as operating expenses have grown at a faster clip than topline growth. There has been a 17% increase in administrative and other expenses. We believe that this increase was mainly due to a strong increase in the marketing expenses of the company. Satyam like all the other Indian software companies is in the process of ramping up their marketing infrastructure so that they can attract more business. Due to this, further pressure can be expected on the operating margins of Satyam.

    Apart from erosion in operating margins due to falling realisations and increase in marketing expenses, a drastic fall in other income and incidence of large extraordinary expenses have taken a severe toll on the bottomline of the company. Other income has fallen by 70% mainly on account of an appreciating rupee. Extraordinary expenses were mainly on account of write off of Satyam's investments. The company has made a provision of Rs 1,263 m towards diminution in the value of investments and advances from Vision Compass Inc. Other write offs included a provision of Rs 253 m towards diminution in the value of investments and non-recoverable trade and other receivables from these investments and an impairment charge of Rs 7 m relating to its investment in Jasdic Park Company as a result of the decision to liquidate the Jasdic Park Company by its Board of Directors.

    The stock is trading at Rs 164 a P/E multiple of 17x its FY03 earnings. Satyam has given a guidance of an EPS of between Rs 15 and 16 for FY04. This implies a profit growth of nearly 9% compared to FY03 (not accounting for the extraordinary expenses). While the company is cleaning up its act and focusing on its core business there are concerns regarding the company one needs to look in to. In a challenging environment like this guidance figures have to be viewed cautiously. Also the fact that Satyam is not able to garner relatively good volume growth, could lead to disappointment for the stock. Investors may want to look at the performance of the company in the coming quarters to get a better picture.

     

     

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