Satyam has posted a net profit of Rs 1,181 m for 2QFY03 as compared to Rs 1,084 m for 1QFY03. This translates to a 9% sequential growth. The figure reported is exceeded expectations and also the management’s guidance. On a YoY basis, net profits have declined by 12% compared to Rs 1,341 m in 2QFY02.
The growth in net profits is due to a strong growth in topline and an improvement in operating margins. The revenues are up 8% sequentially and 17% on a YoY basis. The growth in topline was on the back of a strong 9% growth in volumes and a small (0.5%) sequential decline in billing rates. While the topline growth is inline with trend seen for whole of the industry, the improvement in operating margins is commendable.
Operating Profit (EBDIT)
Operating Profit Margin (%)
Profit before Tax
Profit after Tax/(Loss)
Net profit margin (%)
Diluted number of shares
Diluted Earnings per share*
Satyam added 23 news clients in 2QFY03 (27 in 1QFY03). The list of clients added includes Johnson & Johnson. Satyam for the first time has highlighted its performance in the consulting segment. The company carried out a business process re-engineering (BPR) exercise and subsequently implemented an enterprise resource planning system for its client, an Indian auto component manufacturer. This helped the client reduce its time to market significantly. The total number of active clients at the end of the quarter was 266 (267 in 1QFY03).
Software design and development
Packaged software implementation
Engineering design services
The revenues from software design, development and maintenance showed strong growth. However, the growth in revenues from package implementation has been much subdued compared to the growth seen by others in the industry. Infosys saw revenues from this segment jump 38% sequentially.
Banking and finance
The company’s revenue mix based on industry vertical paints a rather disturbing picture. The revenues from BFSI (banking, financial services and insurance) vertical showed a decline. This is a cause for concern, since BFSI accounts for one-third of the company’s revenues. The BFSI vertical is getting increasingly crowded and consequently, the competition is intensifying. The latest to enter the vertical was Hughes Software Systems that has traditionally focused on telecom related software. Growth mainly came from verticals like telecommunications and healthcare. The strong growth in the telecom segment could be due to a one-off engagement and going forward the growth might taper-off.
There was not much of a change in the revenue mix that tilted in favour of Europe. This was due to a strong sequential growth of 21% from the region. Revenues from other geographies also showed healthy growth, with US growing at the slowest pace.
On a consolidated basis, the company’s profits declined sequentially due losses from subsidiaries and exclusion of income from sale in stake. With the dilution of the company’s stake in Sify to 35%, it will no longer be necessary to consolidate Sify’s numbers. Thus, the EPS as per US GAAP will converge towards the company’s standalone EPS going forward.
RECONCILIATION BETWEEN INDIAN GAAP AND US GAAP
Net profit as per Indian GAAP
Deferred Stock Compensation charges
Amortization of Goodwill
Loss of Subsidiaries & Joint Venture
Gain on sale of stake in Sify
Gain on sale of stake in SGE
Charge off for put options in TRW
Provision not required under US GAAP
Total US GAAP Adjustments
Net Income as per US GAAP
However, the bad news is that the company has significantly lowered its bottomline guidance for FY03. The net profits are now expected to grow in the range of 12% to 14% as compared to an earlier guidance of 20% to 22%. These growth figures include a write off of Rs 408 m in FY02. Excluding this write off that lowered the net profit figure for FY02, the bottomline is expected to grow by 4% this fiscal. The company has marginally lowered its topline guidance also.
At the current market price of Rs 219, the stock is trading at a P/E multiple of 15x its 1HFY03 annualised earnings. While the numbers are better than expectations for 2QFY03, the performance is lackluster when compared to its peers like Infosys. Further, downward revision in EPS guidance indicates that the company has not been able to perform as brilliantly as it peers have.
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