Stock Recommendations:: Satyam Computer

Satyam beat the high expectation of the street by reporting Indian GAAP consolidated revenues of Rs24.2bn (10% qoq and 33% yoy) against consensus Rs23.58bn but net profit of Rs4.67bn was lower than consensus (Rs4.84bn) due to forex losses of Rs461m. Overall, volume growth of 8.8 qoq was lead by 10.7% qoq growth in offshore and 3% qoq growth in onsite. Satyam has reported double digit volume growth qoq in offshore volumes in 6 out of the last 7 quarters. In comparison, both TCS and Infosys have had double digit qoq offshore volume growth only once in the last 7 quarters. EBITDA margins in Q4FY08 expanded by 130bp lower than street expectation of about 150-200bp due to higher marketing expenses. In FY08, Satyam’s revenues grew by 46% and earnings by 40% in US$ terms, which is higher than peers’. While it’s EBITDA margins declined by 200bp (Infosys – 20bp and TCS – 120bp) despite 590bp improvement in utilization and more than 5% increase in pricing due to 16% salary hike (average about 13% for peers) for offshore employees. Satyam’s guidance for FY09 of 24-26% revenue growth (compared to Infosys’ 19-21%) and EPS of Rs29.54-30.04 was in line with expectation Satyam has guided for a margin decline of about 50bp for FY09 and intends to hike offshore salaries by 12-14% (11-13% by Infosys), higher than market expectation. Overall, we believe, Satyam has ample scope to increase wallet share within its existing clients and hence would deliver superior growth. At 14.8x FY09 earnings, which is set to grow by 25%, we maintain Outperformer with a target price of Rs560 and retain it as our top pick in the sector along with Infosys.