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Satyam: Aiming higher - Views on News from Equitymaster
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Satyam: Aiming higher
Jul 18, 2008

Performance summary
  • Topline grows by 8.5% QoQ during 1QFY09.

  • Operating margins expand by 1.3% QoQ during 1QFY09, mainly on account of 3% volume growth and better utilisation as also partially due to rupee depreciation.

  • Net profits grow by 17.3% QoQ during the first quarter of the fiscal.

  • Management has revised estimates of FY09 revenue growth to the range of 32.0% to 34.1% from earlier projected 24% to 26% YoY.

  • EPS is expected to grow by 26.1% to 28.2%.

  • The attrition rate stood at 10.95% and employee strength stood at 51,643, as of 30 June 2008.

Consolidated financial performance
(Rs m) 4QFY08 1QFY09 Change
Sales 24,160 26,208 8.5%
Expenditure 18,654 19,886 6.6%
Operating profit (EBDIT) 5,507 6,323 14.8%
Operating profit margin (%) 22.8% 24.1%  
Other income 230 331 44.2%
Interest 46 57 25.6%
Depreciation 435 467 7.3%
Profit before tax 5,255 6,130 16.6%
Tax 587 653 11.2%
Minority interest - -  
Profit after tax/(loss) 4,669 5,477 17.3%
Net profit margin (%) 19.3% 20.9%  
No. of shares (m)   684.7  
Diluted earnings per share (Rs)   27.13  
P/E ratio (x)   14.08  

What has driven performance in 1QFY09?
  • Satyam recorded an 8.5% QoQ growth in topline for 1QFY09 driven by 3% QoQ growth in volumes. The company has revised estimates of FY09 revenue growth to the range of 32.0% to 34.1% from earlier projected 24% to 26% YoY. The company has also projected its EPS to grow by 26.1% to 28.2%. In spite of ongoing crisis in the BFSI segment, the company witnessed a decent growth of 6% QoQ in the segment. The retail, transportation & logistics division also registered growth of 18% QoQ. The company has started seeing traction in markets outside the US, especially in Europe that were slow to embrace off shoring.

    Revenue break-up by service offerings
      4QFY08 1QFY09  
      Rs m % of total Rs m % of total Change
    Application development and maintenance 10,720 44% 11,697 45% 9%
    Consulting and Enterprise Business Solution 10,887 45% 11,715 45% 8%
    Extended Engineering Solutions 1,621 7% 1,782 7% 10%
    Infrastructure Management 933 4% 1,014 4% 9%
    Total revenues 24,160 100% 26,208 100% 8%

  • Satyam’s operating margins expanded by 1.3% QoQ. This was mainly due to higher volume growth (grew by 3% QoQ) and better utilisation (84.4% using the old base) of offshore resources during 1QFY09. The attrition level also fell from 13.9% in 4QFY08 to 12.58% in 1QFY09 (on TTM basis). The employee strength stood at 51,643 as of 30 June 2008.

    Revenue by industry vertical
      4QFY08 1QFY09  
      Rs m % of total Rs m % of total Change
    Insurance, Banking and Financial services 5,277 22% 5,603 21% 6%
    Manufacturing 6,168 26% 6,046 23% -2%
    TIMES 5,194 22% 5,740 22% 10%
    Healthcare and Pharma 1,711 7% 1,850 7% 8%
    Retail, Transportation & Logistics 2,317 10% 2,741 10% 18%
    Others 3,974 16% 4,227 16% 6%
    Total 24,641 100% 26,208 100% 6%
    *TIMES (telcom,infra,media,entertainment,semiconductors)

  • Satyam recorded 17% QoQ growth in bottomline during 1QFY09, which was aided by higher other income. Other income increased by 44.2% QoQ. While tax expenses increased by 11.2% QoQ and, it did not mask the positive impact of higher other income.

What to expect?
At the current price of Rs 382, the stock is trading at a multiple of 9.2 times our estimated FY11 earnings. The company has been able to grow its volumes but witnessed a decline on pricing front. Overall, we maintain a cautious view on the stocks given the past volatility in performance. While valuations remain attractive, Satyam is not our top pick from the setor.

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