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Satyam: By the book

Jul 25, 2002

Satyam Computers’ 1QFY03 numbers are inline with the guidance given by the company. The revenues have risen by 1% sequentially and the growth in net profits is 46%, including the extra-ordinary expense of Rs 408 m in 4QFY02. Excluding the extra-ordinary item net profits have declined by 6% sequentially. This is due to a steep drop in other income. On a YoY basis, revenues are up by 13%. However, the net profits have fallen by 11%. The decline in net profits on a YoY basis is due to the operating margins in 1QFY03 being sharply lower than corresponding quarter last fiscal.

(Rs m) 4QFY02 1QFY03 Change
Sales 4,577 4,638 1.3%
Other Income 249 77 -69.2%
Expenditure 3,176 3,205 0.9%
Operating Profit (EBDIT) 1,401 1,433 2.3%
Operating Profit Margin (%) 30.6% 30.9%  
Interest 3 1 -47.9%
Depreciation 346 315 -9.0%
Profit before Tax 1,301 1,193 -8.3%
Extraordinary income/(expense) (408) -  
Tax 149 109 -27.0%
Profit after Tax/(Loss) 744 1,084 45.7%
Net profit margin (%) 16.3% 23.4%  
Diluted number of shares 314.5 314.5  
Diluted Earnings per share* 9.5 13.8  
P/E (x)   16.3  
*(annualised)      

The topline growth was on the back of a 4% growth in volumes and a 3.5% decline in billing rates. The company’s volume growth was feeble and billing rate decline was steeper compared to other software majors. While the onsite billing rates declined by 3% sequentially, the drop in offshore billing rates was 4%.

The highlight of the performance is the fact that the company has managed to hold on to its operating margins. Infact operating margins showed a marginally improvement when compared to 4QFY03. The margins have improved as the costs have grown in line with topline growth. However, the steep fall in operating margins on a YoY basis is due to a 31% rise in staff costs.

Service offerings 4QFY02 1QFY03 Change
Software design and development 2,228 48.7% 2,178 47.0% -2.3%
Software maintenance 1,300 28.4% 1,189 25.6% -8.5%
Packaged software implementation 908 19.9% 999 21.5% 10.0%
Engineering design services 140 3.1% 273 5.9% 94.7%
Total 4,577 100.0% 4,638 100.0% 1.3%

The contribution to revenues from onsite projects increased from 49.6% in 4QFY02 to 50.6% in 1QFY03. Consequently, the revenues from offshore projects declined from 50.4% to 49.4%. The geographic break up of revenues remained almost unchanged with US contributing to 77% of the revenues. The revenues from Europe grew by a strong 14% (QoQ). As a result, Europe’s contribution inched up from 11% to 12%. Other geographies i.e. (2% of revenues) and rest of the world (8%) saw a sequential decline in revenues.

Industry verticals 4QFY02 1QFY03 Change
Banking and finance 1,089 23.8% 1,205 26.0% 10.7%
Insurance 692 15.1% 721 15.5% 4.1%
Manufacturing 1,611 35.2% 1,558 33.6% -3.3%
Engineering 135 3.0% - 0.0% -100.0%
Others 1,049 22.9% 1,154 24.9% 10.1%

The feeble topline growth is mainly due to the revenues from software design, development and maintenance declining sequentially. Revenues from engineering services jumped to almost double as compared to the previous quarter. The growth in revenues from the banking, financial services and insurance verticals (BFSI) were strong. However, the revenues from both manufacturing and engineering verticals, declined. The new clients added during the quarter included Bank of Nova Scotia. The company saw significant amount of business coming in from the healthcare segment. Projects bagged included an HIPAA (health insurance portability and accountability act) related assigned. With the healthcare industry having to confirm with the HIPAA act a huge opportunity for Indian software industry is in the offing. In all 27 new clients were added during the quarter taking the total number of active clients to 267.

RECONCILIATION BETWEEN INDIAN GAAP AND US GAAP
(Rs m) 4QFY02 1QFY03 Change FY01 FY02 Change
Net profit as per Indian GAAP 742 1,085 46.2% 5,059 4,577 -9.5%
Deferred Stock Compensation charges (97) - -100.0% (2,100) (508) -75.8%
Amortization of Goodwill (51) (24) -53.7% (214) (209) -2.2%
Loss of Subsidiaries & Joint Venture (233) (275) 17.9% (2,140) (4,182) 95.4%
Gain on sale of stake in Sify - -   (1,780) 1,705 -195.8%
Charge off for put options in TRW (276) 0 -100.1% (128) (492) 285.8%
Others 51 3   (23) (42) 86.8%
Provision not required under US GAAP 407 -   - 407  
Total US GAAP Adjustments (200) (295) 47.5% (6,384) (3,321) -48.0%
Net Income as per US GAAP 542 790 45.6% (1,326) 1,256  

The company’s net profit based on US GAAP also showed an improvement. In FY02, Satyam’s EPS (consolidated) of Rs 2.5 is based on a PAT figure of Rs 785 m. The expenses included a staggering depreciation and amortisation (including impairment of goodwill) figure of Rs 6,303 m. Of this Rs 4,472 m was due to the impairment of goodwill, which mostly due to the write off of astronomical valuations paid for Indiaworld and Cricinfo. Excluding the write off, the EPS for FY02 is Rs 16.8. The numbers could be expected to improve going forward as the company as almost written off its investment in Indiaworld and Cricinfo. While the company has announced plans to divest from its loss making subsidiaries, it has not found any buyers.

The numbers might disappoint when compared to the performance of its peers for the quarter. The software majors that have already reported their numbers (Wipro and Infosys) have shown a strong sequential growth in revenues, beating their own earnings guidance by a wide margin. The employee intake for Satyam was much subdued as compared to others in the sector.

The company floated another subsidiary, Nipuna Services Limited. The subsidiary will address the emerging business process outsourcing (BPO) markets. Satyam is one of the last software majors to jump into the BPO bandwagon. Infosys has floated a subsidiary called Progeon, while Wipro increased its interest to more than 90% in Spectramind in the current quarter.

At the current market price of Rs 225, the stock is trading at a P/E multiple of 13x its FY03 estimated earnings (standalone). While the management is a reason for concern and the numbers for the current are lackluster, the fact remains Satyam in one of the top rung software companies. Considering this valuations are on the lower side. The company’s guidance for the next quarter is much an aggressive one. The company expects a 2% to 5% sequential growth in topline. With operating margins holding steady at 31% Satyam expects net profits to mirror topline growth.


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