Satyam: A pleasant surprise? - Views on News from Equitymaster

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Satyam: A pleasant surprise?

Oct 23, 2001

Satyam’s 2QFY02 result might pleasantly surprise the markets once again, in line with the numbers that have come in from other technology majors. However, our expectations are based on the management’s guidance. According to the management the topline will show a sequential growth of about 2%. The bottomline is however expected to dip in the range of 3% to 5%. This translates to a YoY growth of 55% in topline and a 77% rise in net profits. The key figures to watch would be the company’s topline growth and more importantly the operating margins. Operating margins assume great significance due to the fact that Satyam has been ramping up its business from maintenance to offset losses in revenues from e-commerce and telecom segments. The number could give a clue to how much pricing pressure the company is facing.

(Rs m) 1QFY02 2QFY02E Change
Sales 4,119 4,229 2.7%
Other Income 91 110 20.6%
Expenditure 2,630 2,791 6.1%
Operating Profit (EBDIT) 1,489 1,438 -3.4%
Operating Profit Margin (%) 36.2% 34.0%  
Interest 82 75 -8.2%
Depreciation 229 230 0.3%
Profit before Tax 1,269 1,243 -2.1%
Tax 55 60 -2.6%
Profit after Tax/(Loss) 1,215 1,183 -2.6%
Net profit margin (%) 29.5% 28.0%  
Diluted number of shares (m) 314.3 314.3  
Diluted Earnings per share* 15.5 15.1  
P/E (x)   10.5  
*(annualised)      

Our topline figure is based on assumptions on volume growth. We expect the billing rates to be flat considering the pricing pressure.

Projects
During 2QFY02, the company won a major contract from Unilever. According to the three- year development services agreement with the European home and personal care (HPC-E) division of Lever Faberge Ltd., Satyam will provide onsite development services to HPC-E at their UK site and also create an offshore development center in India. Satyam will provide services in the areas of consulting, software development, customization, implementation and maintenance. The broad domains that Satyam will address will include CAD/CAM/CAE, supply chain management, ERP (enterprise resource planning) and e-commerce areas. SAP implementation, will possibly be a big chunk of the project.

Satyam also bagged a large-scale enterprise-wide data warehousing assignment from the State Rail Authority, Australia. The project will be jointly executed with IPP Consultancy Services of Australia. This project aims to help enhance decision support capabilities of State Rail Authority and also reduce cost and improve operating efficiency. The project duration is likely to be more than 2 calendar years.

Alliances
Satyam extended its offerings in the knowledge management space through a strategic alliance with Autonomy Corporation. Autonomy will provides infrastructure software for the enterprises. According to the alliance, Satyam will offer strategic consulting and systems integration services to architect knowledge management solutions based on Autonomy's infrastructure technology. Autonomy's software can analyze text and voice and identify and rank the main concepts within it. It can then automatically categorize, link, personalize and deliver the information. This moves of capturing and managing unstructured information within an organisation is quite pioneering. However, the solutions have to be widely accepted with the industry to make an impact on Satyam’s financials. This cannot be expected in the near term.

Satyam launched e-Valuate, an asset verification solution for financial institutions. The software is for Microsoft Pocket PC 2002 personal digital assistants (PDAs). The software enables wireless connectivity between the hand held device and enterprise systems. The software is based on the Microsoft .NET framework and integrates Windows - Powered Pocket PC 2002 devices with Microsoft's Mobile Information 2001 server. This move will help Satyam gain a presence in a vast market. Thus, giving it visibility.

Another addition to its portfolio was solution in the collaborative engineering space. Satyam formed an enterprise consulting partnership agreement with Parametric Technologies (PTC’s). Satyam will implement PTC’s Windchill software solutions. Windchill solutions span the entire product development cycle allowing collaboration from design or contract manufacturing to service and support.

At the current market price of Rs 152, the stock is trading at a P/E multiple of 10x 2QFY02 estimated annualised earnings. The subsidy in valuations is due to concerns regarding its subsidiaries. However, Sify’s 2QFY02 results continued to show a decline in cash losses. Cash loss (EBITDA) was reduced to US$ 4.8 m from US$ 6.1 m in 1QFY02. Satyam expects the subsidiary to break even by the end of this fiscal. With the subsidiaries breaking even the company’s valuations could see an upside. However, in the near future the valuations are likely to be range bound due to concerns regarding the third and fourth quarters of FY02.


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