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Satyam: Gaining traction… - Views on News from Equitymaster
 
 
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  • Oct 20, 2004

    Satyam: Gaining traction…

    Introduction to results
    Satyam has announced results for the second quarter and half year ending September 2004, reporting strong sequential growth in both topline and bottomline. However, while margins for 2QFY05 have declined marginally (20 basis points), those for the first half are down by around 270 basis points. Overall, Satyam’s results are in line with what its peers have reported during the quarter.

    Financial performance (Consolidated): A snapshot…
    (Rs m) 1QFY05 2QFY05 Change 1HFY04 1HFY05 Change
    Sales 7,799 8,621 10.5% 11,694 16,419 40.4%
    Expenditure 5,858 6,493 10.8% 8,472 12,351 45.8%
    Operating profit (EBDIT) 1,941 2,128 9.6% 3,222 4,069 26.3%
    Operating profit margin (%) 24.9% 24.7%   27.5% 24.8%  
    Other income 309 240 -22.3% 422 549 29.9%
    Interest 2 2 -17.0% 5 4 -21.6%
    Depreciation 271 280 3.5% 588 551 -6.3%
    Profit before tax 1,977 2,086 5.5% 3,051 4,063 33.2%
    Tax 301 304 1.0% 500 604 20.7%
    Extraordinary items (22) (0)   (3) (23)  
    Share of loss in associate companies (16) (13)   (92) (30)  
    Profit after tax/(loss) 1,637 1,769 8.0% 2,456 3,406 38.7%
    Net profit margin (%) 21.0% 20.5%   21.0% 20.7%  
    No. of shares 314.5 317.6   314.5 317.6  
    Diluted earnings per share* (Rs) 20.6 22.3   15.5 21.4  
    P/E ratio (x)   17.6     18.3  
    (* 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%) and 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 29% in 2QFY05.

    What has driven performance?
    Software development drives topline: Growth in Satyam’s consolidated 2QFY05 topline has been aided by marginal improvement in both onsite and offshore billing rates. While onsite rates improved sequentially by 0.07%, offshore rates were up 0.04%. Increased utilisation in onsite efforts also aided the overall growth in topline. Segment-wise, software design and development business (43% of consolidated revenues) led growth in the company’s topline with a sequential growth of 14%. It must be noted that, as we have indicated in our result analysis for Infosys, the bread and butter business of Indian software companies, i.e., software development, seems to be gaining traction. This is positive news for Indian software companies, as growth in this business is a good indicator of improvement in discretionary spending from clients, something that had taken the backseat during the years of slowdown when clients spent more towards integrating their existing software rather than asking for new development.

    Nipuna, the BPO subsidiary reported a sequential revenues growth of 81% during 2QFY05. It constitutes to just around 1% of Satyam’s consolidated revenues and has 1,350 employees on its rolls. Satyam added 27 customers in 2QFY05. Its active client base now stands at 357.

    Lower offshore utilisation dents margins: Apart from rise in employee costs (as percentage of sales) from 56.4% in 1QFY05 to 57.5% in 2QFY05, decline in offshore utilisation has dented margins for the quarter. As a matter of fact, while onsite utilisation improved marginally, that for offshore fell from 77% in 1QFY05 to 74% in the latest quarter. This decline in offshore utilisation and rise in employee costs is a direct consequence of addition of over 1,200 employees in 2QFY05. While this was the second lowest quarterly addition to manpower in the past year, it is important to note that Satyam has traditionally been less aggressive than its peers like Infosys and Wipro in this regard. The company now has 16,872 employees on its rolls. In comparison, Infosys had 32,949 and Wipro had 37,063 employees on their rolls at the end of 2QFY05.

    Lower other income pares growth in net profits: Despite growing at a decent rate, net profits have failed to keep pace with the topline in 2QFY05. And the reason is the same as has been the case for other software companies – decline in other income due to foreign exchange losses. The company incurred a foreign exchange loss of Rs 8.1 m in the quarter, against gains of Rs 58.7 m in 1QFY05.

    Performance in the recent past
      3QFY04 4QFY04 1QFY05 2QFY05
    Sales (QoQ growth, %) 10.6 8.4 7.8 10.5
    Employee costs (% of sales) 53.8 55.0 56.4 57.5
    Operating margins (%) 25.3 25.7 24.9 24.7
    Profits (QoQ growth, %) (0.0) 0.6 21.9 8.0
    Employees (Nos.) 12,337 14,032 15,631 16,872
    Revenue per employee (Rs m) 0.54 0.52 0.50 0.51
    Revenue per client (Rs m) 22.2 22.3 22.9 24.1

    What to expect?
    At the current price of Rs 393, the stock is trading at a P/E multiple of 18.3 times annualised 1HFY05 earnings. The board of the company has proposed a 100% interim dividend for FY05 (Rs 2 per share). The management has revised its guidance upwards for FY05 for the standalone entity (98% of consolidated revenues). While revenues are expected to grow YoY by 34.4%-34.9%, EPS is likely to be in the range of Rs 22.6 to 22.8 per share.

    Post the result announcement, the stock of Satyam has declined by around 3% in today’s trades. This seems a result of a somewhat lesser performance by the company in comparison to what its peers (Infosys, TCS and Wipro) had reported in their recently announced second quarter results. However, investors should note that there are certain positives that have emerged out of this result announced by Satyam – strong sequential growth in software design and development, improvement in PBIT margins for the IT services segment and continued momentum in the package implementation business. These factors, combined with valuations that are at the lower end of the spectrum, are likely to make Satyam a long-term growth story. However, management concerns remain.

     

     

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