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Satyam: Other income fillip

Jul 22, 2004

Introduction to results
Satyam has reported strong consolidated profits growth for the first quarter of FY05. This is on the back of a decent sequential topline growth and stronger other income growth. However, greater than proportionate rise in expenditure have caused operating margins to decline further.

Financial performance (Consolidated): A snapshot…
(Rs m) 4QFY04 1QFY05 Change
Sales 7,235 7,799 7.8%
Other income 43 309 620.5%
Expenditure 5,374 5,858 9.0%
Operating profit (EBDIT) 1,861 1,941 4.3%
Operating profit margin (%) 25.7% 24.9%  
Interest 2 2 14.0%
Depreciation 265 271 2.2%
Profit before tax 1,637 1,977 20.7%
Tax 283 301 6.2%
Extraordinary items (9) (22) 158.2%
Share of loss in associate companies (2) (16) 595.2%
Profit after tax/(loss) 1,343 1,637 21.9%
Net profit margin (%) 18.6% 21.0%  
No. of shares 321.4 321.4  
Diluted earnings per share* (Rs) 16.7 20.4  
P/E ratio (x)   16.3  
(* annualised)      

Fourth largest software services exporter
Satyam is one of the leading players in the Indian software services space and its offerings include application development and maintenance (70% of revenues), package implementation (26%), engineering design services (4%). Apart from these services, Satyam also provides BPO services through its subsidiary, Nipuna. Over the past couple of years, the company has managed to move up the software value chain, as is visible from the rapid growth in the high-end service of package implementation. The contribution of this service has increased from 6% of revenues in FY01 to over 26% in FY04.

What has driven performance in 1QFY05?
Sales: Strength in Satyam's 1QFY05 topline has been a result of growth in both volumes and onsite billing rates (0.02% improvement). However, offshore rates have declined marginally by 0.04% during the quarter. This decline in offshore rates is expected in light of offshoring becoming mainstream and clients demanding finer rates from their vendors. However, the decline has slowed down over the past couple of quarters and we believe that rates are likely to stabilise. However, Indian software companies can benefit from moving up the value chain by providing services with relatively higher billing rates. Satyam seems to have benefited on this account in 1QFY05, as revenues from the package implementation business, which is high-end and has a higher onsite component, have grown sequentially by 10% in 1QFY05.

Operating margins: The decline in operating margins is a result of the combination of two key factors – addition of 1,600 employees in the quarter and first quarter salary revisions resulting in increased employee expenses. Satyam now has 15,631 employees on its rolls. Based on its continued initiatives on the hiring front, it seems that the management is expecting increased demand for its services going forward. Another reason for the dip in margins can be lower utilisation rates for offshore services.

Net profits: Apart from a decent sequential rise in revenues, that showed in the bottomline, the substantial jump in Satyam's consolidated profits is also a result of substantially higher other income, this being a result of gains due to exchange rate fluctuations. Excluding the other income fillip, the sequential growth in profit before tax has been a dull 2.1% during the quarter.

Performance in the recent past
2QFY04 3QFY04 4QFY04 1QFY05
Sales (QoQ growth, %) 6.7 10.6 8.4 7.8
Employee costs (% of sales) 51.0 53.8 55.0 56.4
Operating margins (%) 26.8 25.3 25.7 24.9
Profits (QoQ growth, %) 19.2 (0.0) 0.6 21.9
Employees (Nos.) 11,250 12,337 14,032 15,631
Revenue per employee (Rs m) 0.5 0.5 0.5 0.5
Revenue per client (Rs m) 20.5 22.2 22.3 22.9

What to expect?
At the current price of Rs 333, the stock trades at a P/E multiple of 16.3x annualised 1QFY05 earnings. While the company continues to report strong sustainable growth on the revenue front, profitability continues to remain a cause of concern. Even in this quarter, substantially higher other income has enabled the company to report a strong sequential profitability growth. Without this, the profitability growth has been poor over the last three quarters. As such, investors need to exercise caution.

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Jul 3, 2013 (Close)


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