Saturday, June 13, 2009


This is a real company with real business – February EBIDTA
margin is back to 17.5%...
…with the management change and some restructuring further
improvement in numbers is likely

Current valuation leaves huge room for an upside…

The Short Story…
Satyam Computer Services Ltd. (SCS.IN/SATY.BO) has been no WorldCom or Enron – where when the dust settled, there was nothing left, but for a pile of debris. Here, as the recently announced results have shown – regardless of whether or not Ramalinga Raju had been riding a tiger as he put it, he and his team did build a real company. That company continues to do business (FY10E revenues are Rs 86 bn or USD1.8 bn), remains reasonably profitable and is still available for something close to a song. By February 2009, EBIDTA margin has recovered to 17.5% (preextraordinaries). Cashflows are already back on track.

Now that the management issues are also behind us, valuation ratios – a P/Sales of 0.8x, EV/EBIDTA of 4.8x, P/E of 7.0x, all on conservative FY10 estimates - appear very attractive. We reinitiate with a ‘Buy’ rating and a Target Price of Rs.110-120.

The Slightly Longer Story…
Satyam announced its brief financials today in a disclosure to the stock exchanges, which was much better than the Street’s expectations and painted a pretty bright picture for the company. In Q3 FY09, the company reported an EBIDTA margin of 16%, as against 3% stated by Mr. Ramalinga in a letter to the BSE, while the NPM for the quarter stood at 8%. However, Satyam had a slightly tougher time in Q4 FY09, as a few of its clients moved away, which was reflected in its numbers for the month of January 2009, when the company reported an EBIDTA margin of 4%. Nevertheless, the situation improved significantly in February 2009 and March 2009. In February 2009, the company’s EBIDTA margin improved to 17.5% pre-extraordinary items (12.4% post these).

Currently, Satyam has an employee strength of approximately 41,000, which is also lower than the company’s earlier announced figure of approximately 55,000 in a press conference held in January 2009. We believe that this will aid the company’s margin improvement, going forward. According to the data provided by Satyam in the disclosure, the company’s cash flows were well under control in the January-March 2009 period. Satyam lost business worth $183 mn in the quarter, on account of loss of credibility, though it managed to win additional orders from existing client amounting to $380 mn. This, to our mind, clearly indicates the strong faith and confidence that Satyam’s clients continue to have in the company, which could well become its key future revenue growth driver. More importantly, Satyam’s association with Tech Mahindra could provide some synergistic benefits, going forward.

Satyam has not yet revised its earlier stated financials and we have, therefore, assumed no change in the company’s financials for the first half of the fiscal FY09. We expect Satyam’s EPS at Rs.14.7 and an EBIDTA margin of 18.1% in FY09.

For FY10, we expect the company to face some difficulty in retaining its volumes as well as pricing and, therefore, expect its margins to decline slightly * . We estimate an EBIDTA margin of 16% and an EPS of Rs 9.5 on revenues of Rs.86 bn for FY10. Thus, today’s announcement made by Satyam has allayed concerns over its financial stability and provides a good outlook for the company. The stock currently trades at an EV/EBIDTA of 4.8x, P/Sales of 0.8 and P/E of 7.0x – all on FY10 estimates – all of which are extremely attractive. We reinitiate coverage on Satyam with a rating of BUY.

Price Target
Price targets (if any) are derived from a subjective and/or quantitative analysis of financial and
nonfinancial data of the concerned company using a combination of P/E, P/Sales, earnings growth, discounted cash flow (DCF) and its stock price history.

The risks that may impede achievement of the price target/investment thesis are -
  • Change in the economic climate/legislation against Indian offshore development in the countries where the company provides its services
  • Billing rate pressure from clients
  • Fluctuation on US$-Rupee exchange rate
  • Salary and wage inflation & high employee attrition
  • Availability of tax holidays and incentives from Government of India
  • Unfavourable decision in legal cases (Caterpillar Inc., Bridge strategy group, S&V
  • Management consultant, Venture Global, U.S. Class action Law Suit, Upaid Litigation and Other unacknowledged claims).