Source: www.satyam.com http://finance.yahoo.com
Recommendation : HOLD (short term overbought)
Sector: Software/ IT Services
Home Country: India
Data below are consolidated US GAAP figures.
Total Revenues 2005 (Fiscal year ended march 2005): 800 mio US$
Net Income 2005 (Fiscal year ended march 2005): 154 mio US$
EPS 2005 (ADS diluted): 0.96 US$
Expected EPS (ADS diluted) (Fiscal years ending march):
2006: 1.43 US$
2007: 1.78 US$
2008: 2.23 US$
Share Price as of March 31st 2006: 43.76 US$
Expected P/E ratio (ADS diluted) for todays share price with expected EPS:
2006: 30.71
2007: 24.57
2008: 19.65
Market Capitalisation: 7.07 bln US$
Target P/E ratio: 25
Target Share Price (ADS) End 2007: 56 US$
(representing a 27% increase to actual share price)
Currency conversion: 1 US$= Rs. 44.3950
Company Profile
Satyam Computer Services Ltd. (NYSE: "SAY") is a leading global consulting and IT services company, offering a wide array of solutions customized for a range of key verticals and horizontals. From strategy consulting right through to implementing IT solutions for customers, Satyam straddles the entire IT space. It has excellent domain competencies in verticals such as Automotive, Banking & Financial Service, Insurance & Healthcare, Manufacturing, and Telecom-Infrastructure-Media-Entertainment-Semiconductors (TIMES). Satyam's network spans 53* countries, across 6* continents. Over 23,000* dedicated and highly skilled IT professionals, work in development centers in India, the USA, the UK, the UAE, Canada, Hungary, Singapore, Malaysia, China, Japan and Australia* and serve over 452* global companies, including over 155* Fortune 500 corporations. Satyam also has a 100% subsidiary called “Nipuna” to compete and focus on the highly competitive ITES / Global sourcing market segment.
Analysis
US GAAP:
According to US GAAP figures, the company recorded gross revenue of US$795.73 million for the nine months ended 31 December 2005 representing an increase of 39.94% compared to the same period last year. The companys consolidated net profit under US GAAP has grown at an average of 35% during the last two years. The total operating income for the period ended 31 December 2005 has grown by 34% compared to the same period last year.
INDIAN GAAP:
As per INDIAN GAAP consolidated financials, the company recorded revenue of 1265.3 crores for the quarter ended 31 December 2005. A noteworthy feature of Q3 performance was the 13.2% sequential increase in earnings per share on the back of expansion in operating margins for the second successive quarter. The companys net profit has grown at an average of 21% during the last two years. The total income for the period ended 31 December 2005 has grown by 69% compared to the same period last year. The company also expects its revenues at Rs.4780 crores for the year ending 31 March 2006, recording an increase of 35% compared to the revenues for the period ending 31 March 2005.
The company also being a major player in the IT Global Sourcing market, has recently bagged US$150 Million worth of business from General Motors partnering with Capgemini and HP to be executed over the next five years. This would indeed result in committed sustained revenue for the next five years along with the opportunity to generate additional revenue from software development.
Company’s Main Strength’s
(1) Strong background and dominance in Information Technology industry.
(2) Consistent growth and performance.
(3) Presence in global countries and global client coverage. Quarter ending December 2005 witnessed 35 new additions to customer base.
(4) Recent order from General motors supports committed revenue for next five years.
(5) IT – ITES sector accounting for 4.8% of GDP. Indian software exports is expected to increase at an average of 25% each year reaching US$60 Billion by 2010.
At A1GLOBALINVESTOR.com we believe that the combination of large and increasing customer base and the strong presence in the high potential global software industry with extremely competitive low cost labor puts Satyam Computers Services Limited in a highly favorable position in the market. With the Indian Stock market being bullish, the stocks of the company have almost doubled in the past 12 month and trading volume has gone up significantly. That is why we expect a correction in the short term and a resumption of the upwards trend of the stock in the medium term.
Bottom Line
The company is growing both in revenues as well as extending its dominance in the global software sector and the Indian outsourcing industry. The company with its increasing customer base is raising its revenues and net income consistently. For our estimates we apply an annual growth rate of 25% for total revenues and net income as we assume a constant margin. With the number of issued shares increasing only insignificantly we arrive at an EPS growth rate for the ADS of about 25% also. We put our target P/E ratio at 25 for the fiscal year ending March 2008 as we believe that is reasonable for a company growing at more than 25% annually. We also compared this P/E ratio to the P/E ratio of the indian market in total which is about 12, and still find our estimate justified by Satyams position in the IT services sector and its excellent growth potential. With our estimated EPS of 2.23 US$ for the ADR for 2008 and the P/E ratio of 25, we arrive at our target share price (ADR) of 56 US$ until the end of 2007. We consider this calculation as conservative. The target share price represents an increase of 27% compared to the share price as of today. Therefore we give this stock a HOLD recommendation. A buy on dips strategy would also be an option in case the stock falls below 35 US$ in the short term market correction.