The Hindu Business Line : Satyam Computers: Buy

INVESTORS may consider taking an exposure in the stock of Satyam Computer Services. At Rs 308, the stock tradesi at a price-earnings multiple of 17 times its per share earnings of Rs 17.5 for 2003-04. On a relative valuation basis, Satyam continues to trade at a sizeable discount to its frontline peers, Infosys and Wipro.

The offshoring story is gathering momentum. This is translating into larger client engagement sizes, higher average billing rates, especially from new clients and a bigger basket of multi-year relationships with Fortune 500 clients. Issues such as fears of an outsourcing backlash in an election year in the US, visa restrictions and unforeseen appreciation in the value of the rupee are slowly receding. There is, however, a need to monitor these variables closely.

The two key challenges to maintaining operating margins will be: Human resource cost pressures (along with an increase in attrition rates) and a high onsite component (which typically increase revenue realisations, but put operating margins under pressure).

Financials and prospects: For the year ended March 31, 2004, Satyam recorded a revenue growth of 23.4 per cent to Rs. 2472 crore and a rise in post-tax earnings by 20.9 per cent to Rs 556 crore.

The operating profit margin dipped by 3.3 per cent to 27.3 per cent, which is attributable to higher personnel expenses. In 2004-05, the company plans to mitigate the salary pressures, to some extent by hiring a number of freshers; which has already started in the fourth quarter of 2003-04.

With better relationship management systems in place, as of the year-end, Satyam was servicing over 100 Fortune 500 clients. The customer additions on a quarterly basis have been fairly strong, with 89 clients accounting for revenues in excess of $1 million, as of March 31, 2004. It has also been slowly stepping up the contribution of fixed price contracts to increase profitability. As far as verticals are concerned, BFSI (Banking, Financial Services and Insurance) along with manufacturing remain the key focus areas. It plans to enhance its focus on Consulting and Enterprise Solutions. For 2004-05, Satyam has projected:

Income from software services of Rs 3,097-Rs 3,146 crore, a growth of 21.8-23.7 per cent over the previous year

Per share earnings of Rs 20.28-20.62, a growth of 16-18.1 per cent over the same period.

As the global offshoring outlook is encouraging, these projections appear achievable.

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