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Satyam: Signs of better times...

Oct 23, 2003

Satyam has announced its September quarter results, reporting a strong sequential topline and bottomline growth of 7% and 22% respectively. However, during the same period, operating margins of the company have taken a hit of around 120 basis points. The performance for 1HFY04 has been equally promising with revenues growing by 20% and profits by 19% YoY. However, the profits for both these periods (quarterly and half-yearly) have been aided by increased other income.

Financial performance: A snapshot
Rs m1QFY042QFY04Change1HFY031HFY04Change
Sales 5,597 5,985 6.9% 9,630 11,581 20.3%
Other Income 107 376 251.4% 136 483 255.6%
Expenditure 3,973 4,319 8.7% 6,631 8,292 25.1%
Operating Profit (EBDIT) 1,624 1,666 2.6% 2,999 3,290 9.7%
Operating Profit Margin (%)29.0%27.8% 31.1%28.4% 
Interest 2 2 -6.0% 3 4 15.5%
Depreciation 295 285 -3.4% 626 579 -7.4%
Profit before Tax1,4341,75522.4%2,5063,18927.3%
Extraordinary items - - - (8) - -
Tax 219 279 27.2% 232 498 114.8%
Profit after Tax/(Loss) 1,215 1,476 21.5% 2,266 2,691 18.7%
Net profit margin (%)21.7%24.7% 23.5%23.2% 
No. of Shares 314.5 314.5   314.5 314.5  
Diluted Earnings per share* (Rs)15.518.8 14.417.1 
P/E Ratio (x)  14.9    16.4  
(* annualised)      

The revenue growth for Satyam in 2QFY04 has been a result of a strong volume growth and reduced pressure on billing rates. On a sequential basis, the decline in the rates has been a marginal 0.6% (0.8% in 1QFY04) for onsite and 0.3% (0.4%) for offshore efforts. Combined with this, in 2QFY04, increasing utilization (both onsite and offshore) has also helped in the growth of Satyam’s revenues and easing of some pressure on the margins.

The growth in topline has also been a result of increased revenues from Satyam’s software design & development (48% of revenues) and package implementation (25% of revenues) services. While the former grew sequentially by 5%, the growth in the high-end package implementation services was at a higher 13%. This was also reflected in increased onsite revenues (57% of total revenues) as services like package implementation initially have a high onsite component attached to them. Satyam added 27 new clients during the quarter and this included Fujitsu, a leading provider of IT and communications solutions. This has helped the company in growing its revenues from the telecom vertical by 14% sequentially. This segment now contributes to around 12% of the company’s total revenues. Among other verticals, while revenues from healthcare grew sequentially by 10%, those from banking and manufacturing grew by 1.2% and 6% respectively.

Operating margins for Satyam have declined during 2QFY04, mainly due to increase in employee expenses. Satyam added 658 employees to its rolls, taking the total count to 11,250. The effect of this addition combined with salary hikes is witnessed in the increase in employee costs, which are around 51% of 2QFY04 revenues (up from 50% of 1QFY04 revenues).

While Satyam has managed to perform well in the September quarter, it is still early days. Till now, among Indian software majors, only Infosys has shown consistent growth in its revenues and bottomline despite the slowdown and, to that extent, it continues to be the industry benchmark. While scalability has enabled Infosys to log in a 70% revenue CAGR in the last five years, Satyam is not far behind at 62% CAGR in revenues. What this indicates is that Satyam may have the potential to scale up and show consistent growth in revenues. However, its performance in the last couple years has not inspired confidence and, from here on, only consistency in performance will be rewarded.

Profitability growth, both for 2QFY04 and 1HFY04, has been aided by the inflow of Rs 139 m on account of completion of sale of Satyam’s 3% stake in Sify. Satyam’s stake in the latter now stands at 32.5%. As for the BPO subsidiary, Nipuna reported a sequential revenue growth of 54% for 2QFY04. At the end of the September quarter, Nipuna had 212 employees and served 6 clients. The quarter saw a US$ 10 m investment in Nipuna by Olympus Capital Holding Asia and Intel Capital Corporation. A similar amount would be invested in this unit During the December quarter.

At the current price of Rs 280, the stock is trading at a P/E multiple of 16.4x its 1HFY04 annualised earnings. For FY04, the management has given 26%-28% (revised up from 18%-20%) revenue growth and Rs 16.7-16.9 (revised up from Rs 15-16) EPS guidance. The management has indicated that while prices would continue to be stable going forward, the growth in volumes would play a major role in the growth of revenues and, consequently, the profits. Satyam has reported improved performance for this quarter but investors should remain cautious as only a sustained performance like this would help the company to grow over the long-term and provide adequate returns to all its stakeholders.

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