Recommendation: Buy (My personal favourite!)
CMP = Rs 383 (at the time of this recommendation)
Price target: Rs 521
Key points:
- The consolidated revenues of Satyam Computer Services grew by 8.5% qoq and 43.2% yoy to Rs 2,620.18 crore in Q1FY2009. In dollar terms, the revenues grew by 3.9% qoq to $637 million. The revenues in dollar terms were inflated by $13.5 million due to accounting difference in the US GAAP and the Indian GAAP. Adjusting for this, the company's revenues grew 1.7% qoq to $624 million, which were below its guidance range of $631.7-634.8 million. This was primarily due to loss of the animation business in Satyam's BPO subsidiary, aggregating to $6.7 million.
- The operating profit margin improved by 134 basis points qoq to 24.1%, despite the negative impact of the rise in the visa cost (80 basis points). This improvement was mainly due to the positive impact of the rupee depreciation and operational efficiency. Consequently, the company's operating profit grew 14.8% qoq to Rs 632.3 crore. The net income grew by 17.3% qoq to Rs 547.7 crore. Despite forex loss of around Rs 36 crore in Q1FY2009, the other income stood at Rs 33 crore in Q1FY2009 as compared to Rs 23 crore during same period last year.
- In terms of guidance for Q2FY2009, the revenues in dollar terms are guided to grow at a muted sequential rate of 2.3% (unadjusted for accounting difference). The earnings in dollar terms for the next quarter are guided to decline by 7.9% sequentially due to the wage hike (effective July). The management is cautious on the demand environment in the retail and the banking, financial services and insurance (BFSI) verticals and maintains its stable outlook on pricing.
- At the current market price, the stock is trading at attractive valuation of 11.9x FY2009 earning estimates and 10.3x FY2010 earning estimates.
- I continue to maintain a strong Buy recommendation on Satyam with a price target of Rs 521.
