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Satyam: Good performance, but... - Views on News from Equitymaster

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Satyam: Good performance, but...
Oct 17, 2008

Performance summary
    • Topline grows by 7.6% QoQ during 2QFY09 on account of higher volume growth.

    • Operating margins decline by 1% QoQ during 2QFY09.

    • Net profits grow by 6% QoQ during the second quarter of the fiscal.

    • Management has revised estimates of FY09 revenue growth (under Indian GAAP) upward to the range of 33% and 35.4% YoY.

    • EPS is expected to grow in the range of 33% to 35% YoY.

    • Attrition rate falls to 12.3 % from 12.6% in the previous quarter.



    Consolidated financial performance
    (Rs m) 1QFY09 2QFY09 Change 1HFY08 1HFY09 Change
    Sales 26,208 28,193 7.6% 38,619 54,401 40.9%
    Expenditure 19,886 21,684 9.0% 30,489 41,569 36.3%
    Operating profit (EBDIT) 6,323 6,509 2.9% 8,130 12,832 57.8%
    Operating profit margin (%) 24.1% 23.1%   21.1% 23.6%  
    Other income 331 796 140.3% 1,737 1,127 -35.1%
    Interest 57 132 130.1% 75 190 152.7%
    Depreciation 467 645 38.1% 778 1,112 43.0%
    Profit before tax 6,130 6,528 6.5% 9,015 12,658 40.4%
    Tax 653 720 10.3% 1,141 1,372 20.3%
    Minority interest - -   - -  
    Profit after tax/(loss) 5,477 5,809 6.1% 7,874 11,286 43.3%
    Net profit margin (%) 20.9% 20.6%   20.4% 20.7%  
    No. of shares (m)       668.5 673.4  
    Diluted earnings per share (Rs)         30.1  
    P/E ratio (x)*         9.3  
    * On a trailing 12-months basis

    What has driven performance in 2QFY09?
      • Satyam recorded a 7.6% QoQ growth in topline for 2QFY09 mainly driven by 4% QoQ growth in volumes. The company has revised estimates of FY09 revenue growth to the range of 33.0% to 35.4% YoY from an earlier projected 32.0% to 34.1% YoY. The company has also projected its EPS to grow by 33% to 35%. The revised estimates are primarily based on the depreciation of rupee against the US dollar.

      • Based on verticals, the TIMES (telcom, infra, media, entertainment, semiconductors) segment registered maximum growth of 16% QoQ during 2QFY09. This was followed by manufacturing (grew 8% QoQ), Healthcare & pharma (grew 6% QoQ) and BFSI segment (grew by 3%). However, the Retail transport & logistics vertical registered a decline of 4% QoQ during 2QFY09. It should be noted that amidst financial crisis in the US and UK, Satyam has been able to grow its revenue from the BFSI segment, albeit marginally.

        Revenue by industry vertical
          1QFY09 2QFY09  
          Rs m % of total Rs m % of total Change
        Insurance, Banking and Financial services 5,603 21% 5,780 21% 3%
        Manufacturing 6,046 23% 6,558 23% 8%
        TIMES 5,740 22% 6,654 24% 16%
        Healthcare and Pharma 1,850 7% 1,954 7% 6%
        Retail, Transportation & Logistics 2,741 10% 2,644 9% -4%
        Others 4,227 16% 4,601 16% 9%
        Total 26,208   28,193   8%
        *TIMES (telcom,infra,media,entertainment,semiconductors)

      • Based on service offerings, the Application development and maintenance segment showed the best performance and grew by 9% QoQ during 2QFY09. This was followed by consulting and enterprise business solution which grew by 7% QoQ during the quarter. This segment accounted for 44% of revenue. Growth in this segment indicated that Satyam is growing its high end offering and climbing up the value chain.

        Revenue break-up by service offerings
          1QFY09 2QFY09  
          Rs m % of total Rs m % of total Change
        Application development and maintenance 11,697 45% 12,707 45% 9%
        Consulting and Enterprise Business Solution 11,715 45% 12,535 44% 7%
        Extended Engineering Solutions 1,782 7% 1,892 7% 6%
        Infrastructure Management 1,014 4% 1,060 4% 5%
        Total revenues 26,208   28,193   8%

      • Satyam’s operating margins declined by 1% QoQ in the second quarter. This was mainly on account of lower utilisation of domestic employees and marginally lower billing rates as compared to previous quarter. The attrition level fell from 12.6% in 1QFY09 to 12.3% in 2QFY09 (on TTM basis).

      • Satyam recorded 6% QoQ growth in bottomline during 2QFY09, which was aided by higher other income. However, higher interest expenses have eaten into the additional other income.

      What to expect?
        At the current price of Rs 280, the stock is trading at a multiple of 7.7 times our estimated FY11 earnings. The management is cautious about the current scenario. In its conference call yesterday, the management indicated that the company will be able to grow topline on account of higher volume and favorable movement of rupee. The management has also indicated that though there is some pressure on the pricing from clients’ side, it expects pricing to be stable in coming quarters. The management is optimistic about growth in its engineering service and manufacturing business. However, considering our broader view of the management and the past volatility in the company's performance, we would take these indications with a pinch of salt. At these levels, while valuations of the stock look attraictive, we believe there are other better options in the software sector.

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