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Satyam: Miles to go - Views on News from Equitymaster
 
 
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  • Jul 24, 2003

    Satyam: Miles to go

    Satyam Computers has reported a sequential topline growth of 4% for the first quarter ended June 2003. While the company witnessed a loss in 4QFY03, the June quarter has seen it back in the black. Loss in the previous quarter was due to a huge write-off of Rs 1.5 bn and if one were to exclude this unusual expense, profits for 1QFY04 have actually grown by 5% sequentially. The company has witnessed a decline in its operating margins (by 60 basis points in 1QFY04).

    (Rs m) 4QFY03 1QFY04 Change
    Sales 5,384 5,597 3.9%
    Other Income 150 107 -28.9%
    Expenditure 3,792 3,973 4.8%
    Operating Profit (EBDIT) 1,592 1,624 2.0%
    Operating Profit Margin (%) 29.6% 29.0%  
    Interest 2 2 5.8%
    Depreciation 312 295 -5.5%
    Profit before Tax 1,429 1,434 0.4%
    Extraordinary items (1,517) 0 -
    Tax 271 219 -19.0%
    Profit after Tax/(Loss) (359) 1,215 -
    Net profit margin (%) -6.7% 21.7%  
    No. of Shares 314.5 314.5  
    Diluted Earnings per share* (Rs) -4.6 15.5  
    P/E Ratio (x)   11.7  
    (* annualised)      

    In 1QFY04, the sequential topline growth for Satyam has been brought about by a 6.2% growth in volumes (4.3% in 4QFY03) and a 0.7% decline in billing rates (0.2% in 4QFY03). The decline in billing rates is a result of sequential drop of 0.8% in onsite rates, 0.4% in offshore rates and 0.3% in domestic rates. This decline in billing rates combined with falling onsite utilizations have affected revenue growth for Satyam in 1QFY04.

    Apart form billing rate pressure, increase in personnel expenses have also impacted 1QFY04 operating margins for Satyam. These expenses have risen from 49% of revenues in 4QFY03 to 50% in the June quarter. Increase in salaries (that is generally carried out in the beginning of the year) combined with increase in staff strength has caused these expenses to rise. Satyam added a net of 833 people in 1QFY04, bringing the total staff strength to 10,592 (9,759 in FY03). If one were to compare Satyam’s past few quarters’ performances with Infosys, the underperformance has continued. In almost all aspects i.e. revenue growth, employee additions and billing rates, Satyam has been a laggard. This is a cause of concern because large clients look for scalability in vendor’s operations. Satyam scores poorly when compared with its peer.

    On the profitability front, Satyam is back in the black in 1QFY04 after witnessing a net loss in 4QFY03. This loss in the previous quarter was due to Rs 1.5 bn write-off towards the company’s investments in VisionCompass and Jasdic Park Company. However, if we remove that effect on profits in 4QFY03, Satyam’s sequential profit growth for 1QFY04 is 5%.

    As far as service offerings are concerned, Satyam continues to make significant progress in the package implementation segment (as can be seen from the table below). This segment has shown a sequential growth of 13% in 1QFY04. However, the core business of software development and maintenance services continue to grow, but at a slower rate. Engineering design services continued to show signs of weakness for the fourth quarter in succession. Satyam has added 22 new clients in 1QFY04 (26 in 4QFY03). This takes the total number of active clients to 289. Notably, the company also improved upon its repeat business percentage from 88% in 4QFY03 to 91% in the June quarter.

    Service offerings: Moving higher in implementation
    Service offerings (QoQ growth) 1QFY03 2QFY03 3QFY03 4QFY03 1QFY04
    Software design and development -2.3% 12.8% 6.9% 1.9% 2.4%
    Software maintenance -8.5% 11.9% 3.8% 7.2% 0.7%
    Packaged software implementation 10.0% 7.0% 2.8% 4.6% 12.8%
    Engineering design services 94.7% -50.5% -14.8% -33.9% -9.2%
    Total 1.3% 7.6% 4.6% 3.1% 4.0%

    At the current market price of Rs 181, the stock is trading at a P/E multiple of 11.7x annualized 1QFY04 earnings. The management has kept intact its FY04 earnings guidance at Rs 15-16 per share (10% YoY growth, excluding extraordinary adjustments). However, Satyam has raised its revenue guidance (in US$ terms) from 15%-17% earlier to 18%-20%. Despite higher revenue growth projections, earnings have not been upgraded, which could be due to the fact that billing rates may remain under pressure.

    Though valuation of the stock is on a lower side compared to the sector average of 16 times, there are reasons for the same. The fact that its profits have been impacted in the past due to bad investment decisions put a question mark over its inorganic growth initiatives.

     

     

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