Result review: Satyam Computer

Result review: Satyam Computer

Satyam reported a strong 7.6% q-o-q growth in consolidated topline for Q2FY09 to Rs2,819 crore. This was marginally ahead of our expectations of Rs2,814 crore.

Volume growth at 4% q-o-q was slightly higher than the 3% q-o-q growth recorded in Q1FY09 but still the slowest in several quarters, reflecting the cautious environment.

The balance growth was led by rupee depreciation witnessed during the quarter, with the realised Rupee rate at Rs43.71 to a dollar, as against Rs41.56 in Q1FY09, up 5.2% q-o-q. Pricing witnessed a fall during the quarter, with offshore and onsite billing rates sequentially declining by 0.4% and 0.8%, respectively.

EBITDA Margins contracted by 104bp mainly on account of the salary hikes of 12% offshore and 3% onsite carried out during the quarter. Employee costs rose, as a percentage of sales, by 224bp q-o-q (61.0% versus 58.8% in Q1FY09). However, Rupee depreciation during the quarter and SG&A leverage ensured that the margin fall was restricted to 104bp.

Satyam has pruned its FY09 revenue guidance in dollar terms, from $2.65-2.69 billion, implying a growth rate of 24-26% y-o-y, to $2.55-2.59 billion, implying a growth rate of 19-21% y-o-y.

The road ahead

Going ahead, we expect Satyam to record a CAGR of 26.7% in topline and 24% in bottomline over FY08-10E. At the CMP, the stock is trading at 7x FY10E EPS, which is close to its historical low valuations. Nonetheless, given the increasing global uncertainty, with the pain seemingly not over as yet, near-term prospects appear hazy for the industry.

With major companies going bankrupt, getting taken over or bailed out, this adds to the uncertainty. Consequently, it is unlikely that IT stocks will see a dramatic re-rating until the dust settles down and revenue visibility improves significantly.

While we have raised our FY09 and FY10 EPS estimates by 5% each, this has primarily been on account of higher rupee-dollar rates for the two fiscals.

We have cut volume growth expectations from 28-30% y-o-y to 22-25% y-o-y, while we have also assumed flat pricing compared to the 1% y-o-y growth assumed earlier. We have also downgraded the P/E multiple for the stock, from 15x to 12x.

The target price has been reduced from Rs530 to Rs455, while maintaining a BUY on the stock, even as near-term stock performance is likely to remain capped.