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Satyam: Beats expectations - Views on News from Equitymaster
 
 
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  • Oct 23, 2002

    Satyam: Beats expectations

    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.

    (Rs m) 1QFY03 2QFY03 Change 1HFY02 1HFY03 Change
    Sales 4,638 4,991 7.6% 8,385 9,630 14.8%
    Other Income 77 59 -22.9% 360 136 -62.3%
    Expenditure 3,205 3,433 7.1% 5,424 6,638 22.4%
    Operating Profit (EBDIT) 1,433 1,559 8.8% 2,961 2,991 1.0%
    Operating Profit Margin (%) 30.9% 31.2%   35.3% 31.1%  
    Interest 1 2 30.8% 89 3 -96.2%
    Depreciation 315 311 -1.1% 522 626 19.8%
    Profit before Tax 1,193 1,305 9.3% 2,710 2,498 -7.8%
    Extraordinary income/(expense) - -   - -  
    Tax 109 123 13.0% 155 232 50.0%
    Profit after Tax/(Loss) 1,084 1,182 9.0% 2,556 2,266 -11.3%
    Net profit margin (%) 23.4% 23.7%   30.5% 23.5%  
    Diluted number of shares 314.5 314.5   314.5 314.5  
    Diluted Earnings per share* 13.8 15.0   16.3 14.4  
    P/E (x)   14.6     15.2  
    *(annualised)            

    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).

    Service offerings 1QFY03 2QFY03 Change
    Software design and development 2,178 47.0% 2,457 49.2% 12.8%
    Software maintenance 1,189 25.6% 1,331 26.7% 12.0%
    Packaged software implementation 999 21.5% 1,069 21.4% 7.0%
    Engineering design services 273 5.9% 135 2.7% -50.6%
    Total 4,638 100% 4,991 100% 7.6%

    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.

    Industry verticals 1QFY03 2QFY03 Change
    Banking and finance 1,205 26.0% 1,070 21.4% -11.2%
    Insurance 721 15.5% 651 13.1% -9.6%
    Manufacturing 1,558 33.6% 1,744 35.0% 12.0%
    Telecommunications 378 8.1% 570 11.4% 51.0%
    Healthcare 66 1.4% 162 3.3% 144.6%
    Others 711 15.3% 793 15.9% 11.6%
    Total 4,638 100.0% 4,991 100.0% 7.6%

    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
    (Rs m) 1QFY03 2QFY03 Change 1HFY02 1HFY03 Change
    Net profit as per Indian GAAP 1,085 1,184 9.2% 2,556 2,266 -11.3%
    Deferred Stock Compensation charges - (21) 0.0% (255) (44) -82.6%
    Amortization of Goodwill (24) - -100.0% (103) - -100.0%
    Loss of Subsidiaries & Joint Venture (275) (237) -13.8% (3,555) (512) -85.6%
    Gain on sale of stake in Sify - -   - -  
    Gain on sale of stake in SGE - (113)   - (114)  
    Charge off for put options in TRW 0 (156) -79655.1% 65 (157) -342.8%
    Others 3 (11)   (77) (8) -89.9%
    Provision not required under US GAAP - -   - -  
    Total US GAAP Adjustments (295) (537) 82.0% (3,822) (835) -78.2%
    Net Income as per US GAAP 790 647 -18.1% (1,266) 1,431  

    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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