Satyam Looks good for medium term prospective

The rupee has depreciated about 14 per cent against US dollar this year, compared to the 11 per cent it had appreciated last year. A falling rupee will help sectors that get revenue from abroad and information technology (IT) will be first to benefit. There are, however, concerns about the growth in this sector due to turbulence in the Western markets, which have been affected in the sub-prime crisis for over a year now. But Indian IT companies have been resilient so far. Moreover, many analysts believe that cost pressures will benefit the outsourcing business.

Among frontline IT companies, Satyam looks attractive as it has seen good revenue and profit growth, both sequentially and year-on-year (y-o-y) in the last one year. The company, India's fourth largest IT service provider by market cap and third largest by income, is present in 63 countries. It serves 564 global companies, one third of which are Fortune 500 companies.

Satyam provides services to about 20 industries including banking, financial services and insurance (BFSI), automobiles, healthcare, manufacturing and telecom-infrastructure-media-entertainment- semiconductors (TIMES). These services include software development,

engineering, enterprise resource planning (ERP) solution, supply chain management, consulting and IT outsourcing. 

Growth. Growth for Satyam has largely been organic, but it has made few acquisitions. In 2005, it had acquired Singapore-based Knowledge Dynamics, a data warehousing and business intelligence solutions provider. The same year it acquired 75 per cent stake in London-based

Citisoft Plc, a highly specialised business and systems consulting firm, and the rest in 2006-07.

Satyam is also partnering FIFA, football's world governing body, and has become the official IT service provider for World Cups 2010 and 2014.

Financials. Satyam has seen both its revenue and profits grow at more than 30 per cent compounded annual growth rate (CAGR) in last three years. Its return on capital employed was 26.07 per cent at the end of FY08. In the first quarter of FY09, its income went up 43.20 per cent y-o-y to Rs 2,653.95 crore, while net profits went up to Rs 547 crore, a jump of 44.77 per cent from the same period last year. 

Operating margins improved to 25.07 per cent and net margins to 20.64 per cent, against 25.01 per cent and 19.98 per cent, respectively, in the same quarter last year. Moreover, at the end of FY08, the company had no long-term debt and was sitting on free cash of Rs 4,461 crore.

Investment rationale. Satyam has managed to perform in an adverse global environment. Its diversified clientele should help it maintain this. BFSI, the trouble area, contributes only about 23 per cent to its total revenue, while the percentage is higher at 44.14 per cent for TCS and 35.7 per cent for Infosys. Satyam's management is cautious of sluggish demand, but we believe that a falling rupee will help margins grow. The rupee is expected to fall further due to rising trade deficit and outflow on the capital account. This would help IT companies improve margins.

Satyam valuations are cheaper than its peers. The stock is available at about 12 times earnings and 2.97 times book value. Infosys is available at 19.3 times earnings and 6.11 times book value and TCS at 16.70 times earnings and six times book value. Moreover, its free cash reserves will come handy in the present situation of expensive and scarce credit if it decides to expand, or acquire businesses.