SATYAM COMPUTER SERVICES: Cut n’ Chop Tactics

Satyam Computer Services, the third largest listed IT companies on the Indian

bourse, has been a key gainer over the past month despite reporting sequential

profit de-growth. Satyam is among the most volatile stocks witnessing huge

volumes and sharp swings in the share price. However, the stock has steadily

improved over the past one month in line with the improved sentiments for the IT

stocks. While the ‘feel good’ factor is certainly responsible for the spurt

in the software stocks in the past couple of months, Satyam’s expected

performance in the second half of current fiscal, is likely to sustain the

current upturn in the stock price.

Formed in 1987, Satyam went public in May 1992 and set up a software

development center in Hyderabad and Secunderabad. The company was founded by its

current chairman B Ramalinga Raju and managing director B Rama Raju. Satyam’s

spectacular rise began in 1994 when it posted excellent financial performance.

Satyam has since continuously expanded its capacity and seen its revenues and

profits increase sharply. In the past five years, Satyam’s total income has

grown at a CAGR of 57% to Rs 1803.10 crore whereas its net profit has risen at a

CAGR of 66% to Rs 490.13 crore. Satyam’s current equity stands at Rs 62.91

crore with promoters holding 22%, FIIs holding 55%, NRIs and the public holding

9% and NRI private bodies and others holding 14% of the shares.

Satyam provides IT consultancy and related services, which includes software

development and maintenance services, packaged software implementation, and

engineering services. Satyam closed the year ended March 2002 with revenues of

Rs 1703.08 crore as against Rs 1192.10 crore in the previous year. Software

design and development contributed 52% of the revenues, software maintenance

contributed 30%, packaged software implementation 14% whereas engineering

services contributed the balance 4%. Manufacturing and BFSI verticals

contributed to almost 60% of the total revenues.

Satyam’s performance in the quarter ended June 2002 was unimpressive with

revenues growing 1% sequentially to Rs 463.81 crore and net profit declining 6%

sequentially to Rs 108.44 crore. However, the employee utilization improved in

the first quarter compared to the immediate previous quarter. In the second

quarter performance, Satyam reported impressive topline with revenues growing

17% y-o-y and 8% sequentially to Rs 499.14 crore. The jump in revenues was once

again propelled by better onsite utilization and improvement in offshore

utilization rates. While the company witnessed marginal pressure on the billing

rates, its volume grew by an impressive 9% volume growth leading to the topline

jump. Personnel expenses were up 5% sequentially to Rs 242.39 crore and are

expected to move up in the subsequent quarters due to increase in software

professionals during the quarter. Satyam’s operating margins moved marginally

from 30.89% in the first quarter to 31.23% in the second quarter. Satyam

incurred forex loss of Rs 15.66 crore in the second quarter and it plans to

shift 25% of the funds held in foreign banks to India. Satyam received Rs 18.34

crore from the sale of it’s stake in the joint venture–Satyam GE Software

Services. Net of the gains on such receipts, Satyam’s net profit declined 23%

y-o-y and 4% q-o-q to Rs 103.67 crore.

While Satyam’s net profit has declined sequentially since the past four

quarters, the jump in revenues and 9% sequential improvement in operating profit

despite higher costs, higher utilization rates and declining share of onsite

revenues indicates recovery. Revenues from onsite activities have declined from

55% of total revenues in the second quarter of previous year to 47% of total

revenues in the second quarter ended September 2002. Satyam added 23 new

customers during the second quarter taking the list of active clients to 263.

In terms of revenues, Satyam witnessed a fall in revenues from the BFSI

vertical, which is a cause for concern. Revenues from manufacturing segment,

which constitute 35% of the total revenues, jumped 12% sequentially whereas a

major spurt was witnessed in the revenues from the telecom and healthcare

segment, which sequentially went up by 51% and 145% respectively. However this

growth came on a lower base as telecom formed 11% of total revenues whereas

healthcare formed just 3% of the total revenues.

Satyam successfully reduced its stake in its subsidiary Satyam Infoway.

Instead of selling of its 52.5% stake in the NASDAQ listed subsidiary, the

reduction in equity was a result of fresh investment of $ 20 mn by SOFTBANK Asia

Infrastructure Fund company and VentureTech Solutions Ltd. Satyam would not have

to consolidate the accounts of Satyam Infoway, which has been making losses

since inception. Moreover, the fresh funds infused would improve its cash

position and would be utilized by Satyam Infoway to further consolidate its

position in the Internet area, which is slowly being exited by a number of

players.

Q2 Highlights Revenues up 9% sequentially and 17% y-o-y to Rs 499.14 crore Operating profit margins up by 34 basis points over the immediate previous quarter to 31.23% Improved volume growth and utilization rates Stake in Satyam Infoway reduced from 53% to 32%

Satyam has entered the BPO space with the launch of Nipuna Services. Nipuna

plans to provide services in the area of HR, Finance, Customer Contact and

Transaction processing.

Going forward, Satyam expects a strong second half based on the current order

book and fresh client addition. Satyam estimates an average sequential growth of

7% in the top line and approximately 25% sequential growth in the bottomline in

the third quarter ended December 2002. In the full year ended March 2003, the

company expects revenues of around Rs 2,000 crore and net profit at Rs 494 crore.

While we expect Satyam to meet its target in fiscal 2003 and report a 34% growth

in topline and 33% in bottomline in the year ended March 2004.

Satyam currently trades at Rs 275 discounting our estimated EPS for March

2003 by 17 times and March 2004 EPS by 13 times. Satyam was trading at Rs 193 in

early October and has risen sharply to Rs 275 within 20 trading days. The rise

has been in line with the spurt in majority of the IT stocks. Satyam has been

trading at a discount to its peers such as Infosys and Wipro due to the volatile

financial performance last year. However, we expect Satyam’s performance to

stabilize and improve going ahead. We expect the stock to continue its gradual

rise as it announces its results for the next two quarters. Market Outperformer.

Sushanto Mitra is the founder

of Technology Capital Partners

The views reflected here are of the author and not of this publication. No

liability is accepted for losses based on theinformation presented here