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Satyam: weight of expectation

Satyam: weight of expectation
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First Published: Sat, Jul 21 2007. 02 17 AM IST
Updated: Sat, Jul 21 2007. 02 17 AM IST
Satyam Computer Services Ltd’s June quarter results were a mixed bag. This is exemplified in the firm’s guidance for the year till March 2008—while the revised revenue forecast was above expectations, earnings per share (EPS) was revised downwards. Given the weight of expectations that Satyam would maintain or even raise its EPS guidance, it’s not surprising that the markets were disappointed. But the firm’s shares fell just 1.4%, as higher revenue guidance for FY08 and the good performance in the June quarter almost made up for that disappointment.
Volumes grew by an impressive 9.5%. Average billing rates also improved, making Satyam the only one among the top four to post double-digit revenue growth in dollar terms. Rupee revenues grew 2.9% to Rs1,830 crore, higher than the April guidance. This is commendable given the rupee’s 7% appreciation last quarter.
The rupee, coupled with additional visa charges borne by the company, impacted operating margins by 400 basis points. But Satyam did well to offset most of this through higher utilization, billing rate increases and other operational efficiencies. As a result, operating profit was maintained at March quarter levels. In contrast, Tata Consultancy Services Ltd and Infosys Technologies Ltd saw operating profit fall between 9% and 11%. But Satyam hasn’t yet borne the brunt of wage hikes. It has said wage hikes in July will impact margins by 350 basis points. If this had happened in the June quarter, operating profit would have dropped by more than 15%.
Despite a stronger rupee, Satyam expects rupee revenues to grow between 21% and 22.5%. But what’s worrying is that it expects net profit growth to be just 15-16%, almost in line with its peers. That hardly justifies Satyam’s outperformance of late on the grounds that it would do better than its peers this year. Analysts say Satyam’s EPS guidance is conservative and that it could easily beat these estimates. But unless that happens, Satyam shares look expensive at about 22 times trailing earnings.
The stock of Tata Tea Ltd has given up almost all the gains it made on news of Coca-Cola’s buyout of Glaceau. It has fallen from a high of Rs990 in May to the current level of around Rs780 or so.
The company’s June quarter results indicate the reason. Consolidated profit before tax (PBT) is down 44% against the previous year, but that includes interest paid on borrowings for acquisitions and an exchange gain on restatement of foreign currency loans. Keeping these out of the picture, PBT from operations was flat.
Yet revenues showed decent growth of 27.5%, driven by acquisitions and by growth at home. But the revenue rise didn’t show up in profit because of higher promotional expenditure by Tetley. While Tetley’s turnover was up 6%, its PBT prior to interest on borrowings for acquisitions was 42% lower. Analysts point out that while Tetley now accounts for half the consolidated turnover, its operating profits are only about 37% of consolidated operating profits. Tata Tea’s stand-alone business didn’t do too well either during the quarter. Though revenues were up 14% year-on-year, operating profits rose by a lower 12%.
The exit from the low-margin plantation business in North India should provide the next boost to the stock. But the fact remains that after converting itself from a plantation firm to a branded player, Tata Tea now faces the task of transforming itself from a low-growth, predominantly black tea company into a high-growth beverage firm. Till investors see signs of that, the stock is unlikely to go anywhere.
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First Published: Sat, Jul 21 2007. 02 17 AM IST
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