The robust second quarter performance, the upward revision in guidance and some strategic changes in operations are expected to sustain investment interest in the stock.
Based on the projected FY 2005-06 per share earnings of Rs 29, the stock trades at a price-earnings multiple of 20 times.
As the growth momentum of Satyam improves, the valuation gap between Satyam and its other frontline peers is expected to narrow further and play to the company's advantage.
Some of the key elements that lend confidence in the stock are:
Margin growth driver: Among the frontline companies, Satyam has turned in the strongest earnings performance, both on a sequential and year-on-year basis. Its surpassing the guidance for the second quarter has paved the way for making an upward revision in its revenue and earnings guidance for the full year.
The operating profit margin also improved by an encouraging 1.2 percentage points to 24 per cent. As the demand environment continues to be robust and Satyam has lower billing rates vis-a-vis its peers, its cushion to improve margins goes up sharply.
Strategic push on multiple fronts: Satyam has worked on multiple fronts to improve its operational performance. It is broad-basing its service offerings to include engineering services and infrastructure management in a sizeable way.
This is expected to reduce its focus on pure play software development and maintenance. Among verticals, Satyam has expanded its focus to include retail, healthcare and transportation along with its traditional focus on banking, manufacturing and telecom.
With two small acquisitions of Citisoft, UK, and Knowledge Dynamics, Singapore, Satyam will be in a position to enhance its focus in Europe and Asia-Pacific. Recently, it also set up a think-tank for pursuing strategic and large-sized deals by bringing on board a senior executive from Computer Sciences Corporation.
This is in line with the worldwide trend involving unbundling of large-size deals that are typically being split among specialised and best-of-breed vendors. The latest ABN Amro deal has sparked this trend.
Improving client composition: While the growth of the top five clients has been in line with its peers, the contribution of clients between top five and top ten has been solid.
The latter has grown by 16.1 per cent compared to a sluggish previous quarter. This, along with 32 client additions and steady increase in client pipeline in the $1 million-$5 million bracket is encouraging.
At the same time, as the competitive intensity in the software services industry increases from multinationals such as IBM and Accenture, Satyam is likely to face some key challenges.
These could range from maintaining the tempo of its consulting and enterprise solutions business, which accounts for nearly 40 per cent of its revenues, identifying clients with growth potential beyond the top ten and managing attrition in this war for talent in the offshoring game.