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May 18, 2001 Performance will lead the way INTRODUCTION Satyam computers has declared its results for the year ended 2000-01 and has raised $ 140 million through the ADS route. Satyam’s profit has grown by more than 100 % but the US GAAP results tell a different story about the results of this leading software services company with interest in ISP business. Satyam’s ISP business continues to bleed and has made investors wary about this scrip. With consolidation of subsidiary accounts being made mandatory in India, the next years’ financial performance is expected to be concerning due to the mounting losses of ISP subsidiary, Satyam infoway, Vision compass and other 4 overseas subsidiaries. We present an update about Satyam’s financial performance and outlook for the future. ** Inside The Report ** Development & Impact * evelopment & ImpactImpact of slowdown in US economy: The slowdown is US economy is expected to affect Satyam, USA being one of the major markets. Satyam gets 75% of its revenue from USA and hence may not be able to maintain the present growth rates as a result of slowdown in US economy. Other frontline software companies are a safer option because they continue to focus on building a business model driven by services business rather than diluting the focus by getting into areas like Internet access and portals. Losses of subsidiaries:
(The figures above give losses of each subsidiary for financial year 1999-00) Satyam has reduced the employee strength in Vision compass, the US based wholly owned subsidiary and brought down the operating cost by 7.5 lakh USD to 3.5 lakh USD. This was done to reduce the increasing losses of Vision compass. The magnitude of cost cutting at Vision compass shows that Vision Compass has not been a major success in the global markets. The company intends to focus on the marketing of this product to its existing clientele. Satyam has targeted the manufacturing supply chain, Telecommunications and the professional services business segments to market this product and entered into partnership program to increase the revenues from this product. ADS issue: Satyam has completed its ADS issue of 14.5 million ADSs (1 ADS = 2 equity shares) and mobilized about $140.8 million. Part of the funds mobilized through ADS offering is to be utilized to repay the debt of Rs.172 crores and make the company a zero debt entity. In software industry, zero debt status is a norm rather than a benchmark. Nevertheless this will improve Satyam’s bottomline in the form of interest cost savings of Rs.34.5 crores. After retiring the debt Satyam will be left with approximately Rs.470 crores which will be used to fund expansion and strategic acquisitions. The capital raised through ADS will not generate good returns only if the company fails to find suitable targets for acquisition. The ADS issue will increase the net worth of the company by about 40%. The ability to service the enhanced net worth of the company is critical in this year when the software services sector is passing through a slowdown and when companies have scaled down capex and fresh recruitments. Satyam’s exposure to businesses like Internet access and portals will have to be more diversified. Alliances: Satyam has tied up with Centre for cellular and molecular biology (CCMB) seeing the enormous potential in the Bioinformatics industry. CCMB is a world-class biotech R&D organization. Satyam plans to leverage the domain expertise of CCMB in the area of Biotechnology. Satyam has also tied up with ideaedge ventures to develop technology solutions for the mobile internet industry. The revenues accruing from these alliances are not clear at present as these alliances are in a primary stage. inancials(Rs In Crores )
* Net loss for 2000-01 as per US GAAP are annualized figures Satyam’s results for FY ended 2000-01 where the revenues have grown by 82% and the PAT has grown by 134%. On a consolidated basis the performance of Satyam is contrasting with a significant rise in losses. This can be primarily attributed to the losses of Satyam infoway, which increased to Rs.165.4 crores for the 9 months ended Dec 31,2000. Satyam revenues from repeat business is 83%, which is higher than 63% during Q4 1999-00 and 78% in Q3 2000-01. The results of Satyam as per US GAAP for the years 1999-00 and 2000-01 have shown net losses. Satyam has posted losses of $ 6.94 millions in 1999-00 and $ 29.4 million for the nine months ended Dec 31st 2000. Under the US GAAP, Satyam has posted huge losses due to consolidation of subsidiaries’ losses, inclusion of deferred stock compensation expense, amortisation of goodwill and non-recognition of gains on sale of shares of Satyam infoway to Government of Singapore investment corporation (GSIC). Next years financial performance will hinge upon Satyam’s ability to successfully employ the capital raised through ADS issue, sustain growth and cut the losses of Satyam infoway and other subsidiaries. aluationsComparative valuations:
Other IT companies like Infosys and Hughes software are quoting at a premium vis-à-vis Satyam at present. The future valuations of Satyam will depend more on the overall performance of Satyam and its subsidiaries rather than Satyam on a stand-alone basis. The company’s valuations will depend on the improvement in the financial performance in the coming 2 quarters. The valuations of frontline software companies might come to attractive levels in the near term due to SEBI’s ban on usage of deferral products giving another opportunity to invest in these companies. Technical view: Last price: 229.75 13 day EMA: 227.00 50 day EMA: 247.00 200 day EMA: 352.00 Support: 219.00 Resistance: 257.00 Scrip is above its 13 day EMA. Thus short-term trend is bullish. ADS listing has witnessed good volumes for last few days. The scrip looks good above 247 as medium term trend turns bullish
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