We spoke to the company officials to get an update on the latest macro developments and some company-specific issues.
The company has maintained that, the macro scenario has remained challenging with the crisis in the US BFSI sector spreading globally and to other verticals. While the spending decisions are getting delayed, the budgeting exercise for CY09 will probably be finalized by Q1CY09 itself.
The manufacturing sector has started seeing some impact in terms of delayed decision-making. The TIMES (Telecom, Media) vertical is also seeing an impact with clients postponing projects.
As far as existing revenues are concerned, there are more concerns about the sustainability of these revenues because of the significantly fluid situation globally. However, there have been no major client-specific developments post 2QFY09. In fact, some of the large accounts have scaled up during 3QFY09 and are expected to contribute in 4QFY09 also.
Revenues from ”impacted” clients like Merrill Lynch have remained steady. The company has also started receiving additional projects from clients like Barclays, negating the impact of Lehman’s revenues.
We believe that, in the near-to-medium term, client specific issues may gain prominence and may lead to differentiated growth rates for Indian IT services vendors over this period.
While on an overall basis, Satyam’s average realizations are expected to be stable in H2FY09 the company has already started seeing some impact in segments of the BFS sector.
Outlook
We expect revenues in FY09 to rise by 32% (33% earlier). EBIDTA margins are expected to be higher due to the rupee depreciation and other cost control initiatives. Consequently, PAT is expected to rise by 34% to Rs.22.6bn, leading to an EPS of Rs33.7.
We have adopted the DCF method of valuation to account for the potential impact arising from the challenging macro environment.
After incorporating lower growth in the foreseeable future, we arrive at a fair value of Rs373 for Satyam. At this price, our FY09E earnings will be discounted 11x. Current valuations are attractive at 6.7x FY09 PE. The stock is available at 1.6x FY09 BV with a RoE of ~27%.
The company is expected to have net cash of Rs58.5 billion as at FY09 end, translating into Rs87 per share. We maintain BUY on the stock.