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Satyam: Other income powers bottomline - Views on News from Equitymaster
 
 
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  • Oct 24, 2001

    Satyam: Other income powers bottomline

    Satyam has posted a sequential growth of 4% in topline and a rise of 10% in net profits for 2QFY02. This translates to a YoY growth of 57% in revenues and a 100% rise in bottomline. However, this significant rise in the bottomline is due to a large other income figure. If the other income figure were assumed to be same as 1QFY02 (Rs 91 m), the net profit figure would in fact, show a sequential dip of 4%.

    (Rs m) 1QFY02 2QFY02 Change
    Sales 4,119 4,266 3.6%
    Other Income 91 269 194.6%
    Expenditure 2,630 2,794 6.2%
    Operating Profit (EBDIT) 1,489 1,472 -1.1%
    Operating Profit Margin (%) 36.2% 34.5%  
    Interest 82 7 -91.6%
    Depreciation 229 293 27.9%
    Profit before Tax 1,269 1,441 13.5%
    Tax 55 100 83%
    Profit after Tax/(Loss) 1,215 1,341 10.4%
    Net profit margin (%) 29.5% 31.4%  
    Diluted number of shares (m) 314.3 314.3  
    Diluted Earnings per share* 15.5 17.1  
    P/E (x)   9.6  
    *(annualised)      

    The operating margins have declined as per expectations. This could be due to pricing pressure the company has been facing. While the company has managed to keep a tab on its employee costs, it is the operating and administrative expenses that have taken a toll on the margins. The operating and administrative expenses have jumped by 16% sequentially. Also, the interest costs have shown a sharp dip but this effect has been offset by the steep rise in taxes.

    According to the consolidated numbers Satyam has again slipped back into a loss. This is due to increased losses of subsidiaries and joint ventures. This might negatively impact the stocks valuations. However, this includes a one time writing off Rs 5,296 m towards impairment of goodwill and other acquisition costs in Sify’s books. If this effect is eliminated by adding back 52% of Rs 5,296 m (as Satyam has a 52% stake in Sify) the subsidiaries would have posted a loss of Rs 302 m. Taking this into account the company’s net gain under US GAAP would have been Rs 947 m.

    RECONCILIATION BETWEEN INDIAN GAAP AND US GAAP
    (Rs m) 1QFY02 2QFY02 Change
    Net profit as per Indian GAAP 1,204 1,359 12.9%
    Deferred Stock Compensation charges (136) (119) -12.7%
    Amortization of Goodwill (51) (52) 2.3%
    Loss of Susidiaries & Joint Venture (545) (3,056) 460.4%
    Other accounting differences (71) 61 -185.6%
    Total US GAAP Adjustments (803) (3,166) 294.2%
    Net Income as per US GAAP 400 (1,807) -551.4%

    The company managed to add to 24 new clients during the quarter. The new clients added include names like Novartis, Hitachi Data and Holden (GM). However, the company client concentration has increased with the contribution from top ten clients moving up from 48.3% to 52.0%. The contribution of revenues from onsite services increased to 45.1% compared to 41.3% in 1QFY02. The increase in the contribution of onsite revenues could have taken a toll on the company’s operating margins.

    Satyam’s software design & development business along with the engineering design showed a sequential decline. The company continued to show an increase in business from areas like implementation of software packages like SAP and software maintenance. The implementation business showed a strong growth of 72% sequentially. During the quarter, Satyam won a major contract from Unilever. The broad domains that Satyam will address will include CAD/CAM/CAE, supply chain management, ERP (enterprise resource planning) and e-commerce areas. With SAP implementation possibly being a big chunk of the project the revenues have shown a jump.

    % Contribution to revenues 1QFY02 2QFY02 Change
    Software design and development 58.8% 52.2% -8.2%
    Software maintenance 29.7% 32.2% 12.0%
    Packaged software implementation 7.1% 11.8% 71.9%
    Engineering design services 4.3% 4.0% -5.7%

    The geographic mix changed in favour of the US and Europe. The European markets that in 2QFY02 showed a strong growth of 24% accounted for 9% of revenues. However, the US markets continued to be the most dominant, accounting for 78% of the revenues. Japan and the rest of world showed de-growth accounting for 2% and 11% of the revenues respectively.

    Satyam expects to post a top line growth in the range of –2% to 1% for 3QFY02. The company has given a very narrow range for the topline. This could indicate a high degree of visibility. For the net profits, the company is expecting a sequential drop of 20% to 25%. However, excluding the large other income component, the dip works out to be in the range of –6% to –0.3%. This could be due the increased pressure on billing rates. Satyam has been ramping up business from areas like maintenance and package implementation that have lower margins.

    The company has toned down its guidance for the FY02 bottomline. The growth in net profits for FY02 is now expected to be in the range of 37% to 41% compared to 47% to 51% given previously. The net profit figure for FY01 is excluding the effect to extra-ordinary items. The company expects a topline growth of 30% to 33% in US$ terms. Earlier Satyam had given a topline guidance of 40% for FY02. However, if the company beats its topline expectation of Rs 4,300 m for 3QFY02 it needs only a 2% sequential growth in 4QFY02 to clock a topline growth of 40%.

    While Satyam might meet its topline growth estimate of 40%, the margins are a cause for concern. This is because, the kind of businesses Satyam has been taking up i.e. maintenance and package implementation, have lower margins. Thus, bottomline growth will be a concern. On the positive front, losses from subsidiaries continue to decline and if the subsidiaries break even the stock may see a significant upside.

    The results are more or less in line with market expectations and the company’s guidance. At the current stock price of Rs 164, the stock is trading at a P/E multiple of 10 times its 2QFY02 annualised earnings. The results are unlikely to have much of an impact on the valuations and the stock will be range bound.

     

     

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