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Itís Satyam now

Jul 2, 2001

Satyam has finally admitted to the fact that the downturn in the US has caused its clients to delay implementation and some have even gone so far as to defer projects. Satyam till date had mentioned that it was cautiously optimistic about the future. However, it seems that the US economy has taken its toll on the optimism. In fact when the results for the quarter ended March 31st 2001 came in it was Satyam that had managed to stand out for two reasons. Firstly, it has shown a strong sequential growth of 18% (at the cost of operating margins though) and secondly, it had somehow managed to put the results up on its website before the board meeting.

(Rs m)3QFY014QFY01Change
Sales 3,276 3,866 18.0%
Other Income 52 (24)-145.8%
Expenditure 2,039 2,425 18.9%
Operating Profit (EBDIT) 1,237 1,441 16.5%
Operating Profit Margin (%)37.8%37.3% 
Interest 76 66 -13.5%
Depreciation 242 228 -5.9%
Profit before Tax 971 1,123 15.7%
Tax 95 11 -88.9%
Profit after Tax/(Loss) 876 1,113 27.1%
Net profit margin (%)26.7%28.8% 
No. of Shares (eoy) 281 281  
Diluted Earnings per share* 12 16 27.1%
*(annualised)   
P/E (x)   11  

It is not surprising to hear that the slowdown might hurt the topline. For once, things were beyond the management. The April to June quarter (that ended on the 30th of June 2001) has been tough for the Indian software companies. This is due to the fact that despite all attempts to revive the US economy, it is still sluggish. And the answer to the million dollar question Ė when will the US economy recover? It is still anybodyís guess. According to a survey by Red Herring of Ďworldís most important and influential thinkersí (includes economists, policy workers, industry insiders and of course financial analysts) only 9% of the participants were of the view that the US economy would recover by September 2001 (3rd quarter for FY01), 33% felt that the recovery would be by December 2001 (4th quarter for FY01), an equal number (33%) felt that the slowdown would stretch up to March 2002 (1st quarter for FY02) and 30% felt that it would recover by June 2002 (2nd quarter for FY02) or later.

The opinion is quite clearly divided. In such an environment corporates are likely to keep a careful eye on their IT spend and are unlikely to spend more.

Satyam has apparently cut billing rates in the quarter ended June 30 (1QFY01 for Satyam), to take on competition. To increase revenues the company will now push its offshore services aggressively. With the scenario becoming tough clients have been putting pressure on the software companies to reduce billing rates or to deliver more for the same price. Therefore, it is likely that Satyamís operating margins might fall further in the coming quarter.

When Satyam declares the results for 1QFY02 it is likely to show a lower sequential growth rate. Also, the business mix might once again shift in favour of the maintenance work (it had done so in the previous quarter).

Despite showing such a strong topline growth in the 4QFY01 Satyam has lost considerably on the bourses. Infact the company is now trading at a P/E multiple of 11 times its 4QFY01 annualised earnings. One of the factors that could be hurting the valuations of the company is the concern regarding its subsidiaries, which are making losses.

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