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Satyam: Positive numbers

Aug 13, 2001

Satyam has declared its consolidated results for 1QFY02. The revenues for the quarter increased by 2% compared to 4QFY01 (revenues for Satyam alone has shown a growth of 6.6%). The contribution of Satyam Computers in 1QFY02 to the revenue was 89% compared to 85% in 4QFY01. However, the highlight of the performance was that the company posted operational profits of Rs 135 m. Thus, addressing the concern that has been haunting the company’s valuations. The operational profits are due to the company’s stock compensation amortization figure declining by 44% sequentially. According, to the US GAAP, the difference between the fair value of the stocks and the discount at which they have been offered to employees, as a part of stock compensation expenses has to be amortized.

(Rs m)4QFY011QFY02ChangeFY00FY01Change
Revenues 4,527 4,637 2% 7,647 14,332 87.4%
Other income net 55 71 28% 49 300 513.7%
Cost of revenues (x) 2,726 2,648 -3% 4,206 9,678 130.1%
Selling, general and administrative expenses (y) 1,588 1,513 -5% 3,236 5,673 75.3%
Amortization of goodwill (z) 345 341 -1% 234 1,150 390.3%
Total expenses (x+y+z) 4,659 4,503 -3% 7,676 16,500 115.0%
Operating income (loss) (132) 135 - (29) (2,169)7315.3%
Operating Margin (%) - 2.9% - - - -
Interest expense 79 47 -41.1% 403 181 -55.0%
Income (loss) before income taxes,
inority interest and equity earnings (losses)
of associated companies
(156) 159 - (383) (2,050)434.9%
Income taxes 105 54 -48.3% 75 192 155.5%
Income after taxes (261) 105   (458) (2,242) 
Minority Interest 409 384 -6.0% 130 1,198 825.4%
Income/(loss) before equity in earnings
(losses) of associated companies
147 489 231.6% (329) (1,044)217.2%
Equity in earnings/(losses)
of associated companies, net of taxes
(79) (89)12.0% 6 (254)-
Net income/(loss) 68 400 486.8% (323) (1,298)302.2%
Diluted number of share 287 287 - - - -
Earnings per share (annualised) 1.0 5.6 487% - - -
P/E 163.0 27.8 ----
1.Cost of revenues inclusive of deferred stock compensation of $ 31,336 in fiscal 2001, $12,936 and $2,254 in three months ended June 30, 2000 and 2001 (unaudited).
2.SG&A expenses inclusive of deferred stock compensation of $14,782 in fiscal 2001, $4,726 and $1,052 in three months ended June 30, 2000 and 2001 (unaudited)
3.1US$ = 46.5 Rs

Another positive in the result was the sequential decline of 16% in losses from subsidiaries. This was inspite of the fact that the revenues from subsidiaries declined sequentially by 21%. However, the operating margins are still very low. Excluding stock compensation amortization and goodwill amortization the operating margins come to around 7%. This is due to the Rs 545 m losses that the company has incurred on account of its subsidiaries and joint venutures.

Regarding the subsidiaries, the management has stuck to its grounds that Satyam Infoway and VisonCompass will break even by 4QFY02. And the company is not planning any further investments in VisonCompass if the subsidiary does not break even by FY02.

RECONCILIATION BETWEEN INDIAN GAAP AND US GAAP
(Rs m)FY00FY014QFY011QFY02
Net profit as per Indian GAAP 1,393 4,952 1,111 1,204
Deferred Stock Compensation charges (765) (2,056) (246) (136)
Amortization of Goodwill (110) (209) (51) (51)
Loss of Susidiaries & Joint Venture (857) (2,095) (654) (545)
Gain from sale of Infoway stake under Indian GAAP - (1,743) - -
Other accounting differences 17 (147) (92) (71)
Total US GAAP Adjustments (1,715) (6,250) (1,043) (803)
Net Income as per US GAAP (323) (1,298) 68 400

At the current market price of Rs 155 Satyam is trading at a P/E multiple of 28 times its 1QFY02 earnings on a consolidated basis. The earnings multiple that Satyam enjoys in amongst the best in the software sector. As the earnings from the subsidiaries improve, the company’s valuations hold the stocks might see a further upside.

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