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Satyam: Other income boosts net

Oct 23, 2007

Performance summary
  • Topline grows by 11% QoQ during 2QFY08. Growth led by 9% QoQ growth in volumes and improvement in billing rates.
  • Operating margins contract by 2.6% QoQ due to wage hikes and rupee appreciation.

  • Bottomline grows by 8% QoQ – duly helped by higher other income (75% QoQ growth).

  • FY08 revenues seen at US$ 2.08 bn up from the earlier guidance of US$ 1.98 bn. EPS guidance for FY08 upgraded from Rs 24.6 to Rs 25.1.

Consolidated financial performance
(Rs m) 1QFY08 2QFY08 Change 1HFY07 1HFY08 Change
Sales 18,302 20,317 11.0% 30,448 38,619 26.8%
Expenditure 14,199 16,290 14.7% 23,273 30,489 31.0%
Operating profit (EBDIT) 4,103 4,027 -1.8% 7,175 8,130 13.3%
Operating profit margin (%) 22.4% 19.8%   23.6% 21.1%  
Other income 632 1,105 74.8% 1,027 1,737 69.1%
Interest 33 41 23.5% 53 74 41.1%
Depreciation 387 391 1.0% 737 778 5.6%
Profit before tax 4,315 4,700 8.9% 7,413 9,015 21.6%
Tax 532 609 14.6% 675 1,141 69.0%
Minority interest - -   (1) - -100.0%
Profit after tax/(loss) 3,783 4,091 8.1% 6,739 7,874 16.8%
Net profit margin (%) 20.7% 20.1%   22.1% 20.4%  
No. of shares (m)         684.8  
Diluted earnings per share (Rs)*         22.2  
P/E ratio (x)*         20.7  
* On a trailing 12-months basis

What is the company business?
Satyam is India’s fourth-largest software services exporter. The company’s service offerings include application development and maintenance (47% of revenues), consulting and enterprise business solutions (41%), extended engineering solutions (7%) and infrastructure management services (5%). Satyam also provides BPO services through its subsidiary, Nipuna, which had revenues of US$ 38 m in FY07.

What has driven performance in 2QFY08?
Volume and billing rates drive topline: Satyam recorded a strong 11% QoQ growth in topline for 2QFY08 driven by 9% QoQ growth in volumes and improvement in billing rates. The onsite and offshore billing rates improved by 2.2% QoQ and 1.3% QoQ respectively. In the past few quarters, Satyam has posted good volumes growth, which can largely be attributed to a number of large deals that it has won in the past 12 months. As regards the improvement in billing rates, the company has always worked at good 15% to 18% discount to its peers like Infosys and Wipro. So the scope for improvement in billing rates is good for Satyam provided the company maintains and improves the service quality and execution capability.

As regards revenues by geography, US recorded 5% QoQ growth and contributed to less than 60% of the total revenues during 2QFY08. On the other hand, Europe and Rest of the World recorded 16% QoQ and 26% QoQ growth respectively.

As regards revenues by service offerings, Satyam has a good blend of ADM and high-end work. The ADM revenues recorded 12% QoQ growth in 2QFY08 whereas Consulting and Enterprise Business Solutions recorded 13% QoQ growth. Revenues from Engineering and IMS services were largely flat, recording 1% QoQ and 3% QoQ growth respectively.

As regards revenues by business verticals, The BFSI segment recorded 11% QoQ growth in line with the topline growth but the pick of the verticals were TIMES (Telecom, Infrastructure, Media, Entertainment and Semiconductor) and Retail, distribution and logistics segment which recorded 19% and 20% QoQ growth. The laggard was the manufacturing segment, which recorded a mere 2% QoQ growth.

Satyam added a net of 3,420 employees during the quarter. The attrition rate came down to under 14%. This is a big positive for the company considering that 8 quarters back Satyam was battling with attrition rate of nearly 20%. Satyam also managed to increase its utilisation rates. While onsite utilisation went up by almost 1% QoQ, the offshore utilisation levels increased by 1.5% QoQ. The revenues break up between onsite and offshore stood at 50:50. The company added 37 new clients in 2QFY08 and the number of active clients including subsidiaries now stands at 599.

Performance in recent past 3QFY06 4QFY06 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08 2QFY08
Sales (QoQ growth, %) 9.6 3.8 9.8 11.0 3.7 7.1 2.9 11.0
Employee costs (% of sales) 58.3 57.1 57.6 61.3 58.2 63.3 62.2 64.1
Operating margins (%) 24.9 25.5 24.6 22.6 24.7 23.1 22.4 19.8
Profits (QoQ growth, %) 13.7 5.5 24.4 (9.7) 5.4 16.7 (3.9) 8.1
Employees (Nos, incl. subsidiaries) 23,432 28,624 29,843 34,908 38,188 39,552 42,347 45,767

Wage hikes dampen operating margins: Satyam recorded a 2% QoQ decline in operating profits during 2QFY08. Operating margins contracted by 2.6% QoQ. This was mainly due to wage hikes affected during the quarter. Unlike Infosys and TCS, which give their annual salary hikes in first quarter of the financial year, Satyam hikes salary levels in the second quarter. The salary hike for the onsite employees was to the tune of 5% and that for offshore employees at 16%. Although the management in the conference call in 1QFY08 said that the impact of wage hikes on operating margins would be around 3.5%, the actual impact was 2.6% largely because of higher volumes, improvement in productivity and increase in utilisation levels. The management has indicated that operating margins could decline by 1.75% YoY in FY08.

Higher other income boosts bottomline: Satyam recorded 8% QoQ growth in the Bottomline, which was driven by 75% QoQ growth in other income. While the effective taxes increased marginally during the quarter, higher other income was enough for a decent bottomline performance. Other income includes forex gains of Rs 430 m.

Results of subsidiaries and joint ventures (Rs m)
  1QFY08 2QFY08
Subsidiaries Revenue PAT Revenue PAT
Nipuna 503 (10) 609 (5)
Citisoft 216 8 227 14
STI 11 (4) 9 4
China 86 (32) 113 (23)
Joint ventures        
CA Satyam 18 1 25 3
Satyam venture 156 1 176 (2)
Total 991 (37) 1,159 (9)

What to expect?
At the current price of 459, the stock is trading at a multiple of 13.4 times our estimated FY10 earnings. While Satyam has recorded strong topline growth over the past few quarters, the bottomline growth in this quarter comes as a pleasant surprise considering that this is the quarter when the wage hikes were affected. Secondly, the performance of the subsidiaries are improving. While the profitable subsidiaries have increased their profits on QoQ basis, the loss making subsidiaries have reported decline in losses in 2QFY08, which is again a positive. The company has spent Rs 51.3 m in 2QFY08 to buy out the minority stakeholders in Satyam’s BPO ‘Nipuna” and now Nipuna will be renamed as “Satyam BPO services”. This is a good development for the company as it indicates management confidence in the BPO operations. In FY08, Satyam’s BPO is expected to clock revenues of US$ 61 m and will be positive at the EBITDA level. The company will be incurring capex of US$ 20.6 m in 2QFY08 and the capex for FY08 will be around US$ 80 m to US$ 100 m.

On the employee addition front, the headcount will cross 52,000 at the consolidated level by FY08. This is an indication of growth seen across verticals as company has given a growth guidance of 42% YoY in US dollar terms of which 4% is expected to come from pricing and remaining 38% to come from volumes. On the negative side while the wage hikes have affected operating margins to the tune of 4.5% in QoQ terms, the YoY impact of wage hikes on operating margins will be around 3.6%. It remains to be seen how the company mitigates this impact to reduce the decline in operating margins to 1.75% YoY.

Satyam will be buying out UK based Nitor Corporation for £ 2.8 m. Nitor has revenues of US$ 20 m and has 20 high end consultants. Nitor focuses in the IMS space in the Europe region. We believe that this is positive in two ways. First, it will increase the company’s exposure in the IMS segment which is the most sought after service offering in the IT arena and secondly since it focuses on Europe region it will help Satyam to further reduce its dependence on the US economy. We maintain our positive recommendation on the stock from a long-term perspective

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Jul 3, 2013 (Close)


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