Satyam Computer has transformed from a predominantly Y2K solutions company to a multi-faceted, totally integrated IT solutions provider in the past three years. Besides, with its various tie-ups and new ventures Satyam can maintain its stellar growth rate in the next couple of years. After falling a whopping 55 per cent in less than two months, the stock looks attractively priced.
Business Profile
Satyam is engaged in a range of IT solutions including Software Development Services, Systems Integration, ERP Solutions, Product Development, Internet access & hosting services, Electronic Commerce and Consulting. Satyam has nearly 4400 technical personnel operating out of its state-of-the-art software development centers located in India, the USA, Japan, Singapore and the UK. The company caters to over 150 Fortune 500 companies. Satyam has attained the highest level of maturity SEI-CMM Level 5, attained any Indian company.
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Satyam specializes in customized IT solutions for industries in the areas of Manufacturing, Financial services, Insurance, Transportation, Telecom, Healthcare and Power. The company also offers Network and network-enabled services in India. It provides Internet access & hosting services, Intranet, e-mail, EDI, store & forward, and online information services. Satyam is involved in virtual product development and the creation of proprietary software as well.
Favourable Business Mix
The company has witnessed significant changes in the technology mix. With favourable tilt towards high growth areas Satyam is moving up the value chain. This likely to result in better margins.
Y2K accounted for a marginal 5.2 per cent of revenue as against 28 per cent in the previous year. Other legacy projects contributed 21.4 per cent (31 per cent). Open system and client server projects decreased from 38 per cent to 28.8 per cent. On the whole, application development and maintenance business contributed about 55 per cent of revenue. On the other hand, specialised services grew briskly - ERP solutions (SAP and Oracle) contributed 9.5 per cent, Telecom and digital communications 11.2 per cent, internet and e-commerce projects 17.4 per cent, with engineering services making up the balance of 5.7 per cent. Total solutions business made up over 25 per cent of total revenues.
Satyam is also working towards productising a select range of services into branded solutions, particularly in the areas of embedded services, web/e-commerce, enterprise architecture applications, and legacy asset management. This will help the company achieve faster growth and better profitability.
Client base
Satyam derives over two-thirds of the revenue from offshore projects. The 7 offsite development centers established in USA, UK, Singapore and Japan are fully operational. Currently, 20 per cent of the work is done offshore for these off-site centers. In the next couple of years, 80 per cent of the offsite center work will be done offshore, improving margins significantly. Besides, volumes in offsite centers is also likely to increase. Currently, North America continues to be the mainstay of business making up for 76.6 per cent of all offshore business, with Japan at 8.7 per cent, Europe at 6.9 per cent and Rest of World providing 7.8 per cent. The company is also broadbasing its client base apart from successfully translating its Y2K clients into non-Y2K business. The share of revenues from new customers acquired during the year was 30.3 per cent with over 50 new large customers added to the client list. The share of top 10 customers has reduced to 54.74 per cent.
Growing internet business
Satyam Infoway, the Nasdaq listed company in which Satyam holds a 57.5 per cent stake has posted a record turnover growth of 535 per cent this fiscal. The turnover of the company has increased to Rs. 65.34 crore from Rs. 10.28 crore in the previous year. Net Loss for the year was Rs. 28.25 crore.
Infoway is both an ISP and has a portal satyamonline.com. Infoway offers Internet Services in 40 cities and has over 151,000 Internet subscribers. Infoway is currently focusing on content provision. Presently, page views are estimated around 51 million. Other significant initiatives include virtual private network solutions, virtual marketplace for IT solutions, online air travel, hotel and car hire services on Satyam Infoway's portal, value-added messaging solution, internet access to Cable TV subscribers in Jamshedpur, virtual marketplace to buy and sell services and a portal for the plastic industry. Infoway is also planning to launch private international gateways to the internet in partnership with Singapore Telecom.
Vision Compass
The company launched Vision Compass globally in March 2000 through its wholly owned subsidiary Vision Compass Incorporated based in Seattle. Vision Compass is an enterprise goal setting and performance measurement software. The software is the only comprehensive Web-enhanced solution for collaborative enterprise management in the international market.
Vision Compass is a sophisticated management tool, the market for which is still evolving in the US. Analysts expect this category to generate a turnover of over a billion dollars. In the best case scenario Satyam could garner about 25 per cent marketshare. Analysts suggest, that the product has immense potential and could be a big revenue spinner for the company. It is likely to break-even in FY 2001.
Currently, the company has got a $1,50,000 order from Toshiba. The company is also expecting a sizeable order from GE and is in the process of customising it. Satyam is contemplating Nasdaq listing for Vision Compass, which will unlock hidden value.
Valuable tie-ups
Satyam-GE Software Services, the 50:50 joint venture with GE Industrial Systems has done well, executing 40 projects in its very first year of operation. The company caters to the software and design needs of the GE Industrial System's worldwide product development activity. CAD, CAM, CAE are the main technology focus areas.
Satyam Venture Engineering Services, a new 50:50 joint venture with the $2 billion Venture Inc., USA was formed in January 2000. The JV will provide CAD/CAM/CAE and engineering design solutions to the auto sector worldwide. The Company has a strong order book exceeding Rs 17 crore and is executing orders for customers in Japan, USA, Germany, and Australia.
Satyam has established partnerships with Siebel, the world leader in customer relationship management (CRM) solutions and i2, the leader in supply chain management applications. Together with the existing relationships with SAP and Oracle, the company now has a very strong enterprise application portfolio. It is also building partnerships in e-business with companies like Vignette that would be announced over next few months.
Sustainable growth
The company has consistently managed about 100 per cent topline and over 85 per cent bottomline growth year-on-year in the past three years. As the company has already invested considerably on its development centers, capex in the ensuing years is likely to be modest. As a result, capital utilisation should be better in the coming years translating into better return on capital numbers. Analysts expect the company to post a growth of 70 per cent in topline and about 80 per cent in bottomline in the next two years.
The company has debt of Rs 245 crore in its books which dampens net margins. Satyam is contemplating sale of a part of its stake in Satyam Infoway and use the proceeds to retire its debt. If the interest cost of Rs 40 crore is avoided, it will add Rs 7 to the earnings directly.
Attractive valuation
Compared to other top-rung IT services companies, Satyam trades at a substantial discount. Satyam has a market capitalisation of Rs 18,100 crore. If the 57.5 per cent stake in Satyam Infoway is taken off from the price of Satyam Computers based on the prevailing market capitalisation of Satyam Infoway on Nasdaq, the residual price of Satyam Computer is Rs 1860. At current price of Rs 3190, the company gets a discounting of 77 times current earnings. This is far less than the discounting given to similar service companies like Infosys (182), Wipro (275), Hughes Software (123), Polaris (99).
Of course, the lower discounting given to the company is on account the concerns on the management front and rather erratic return on capital generated by the company in the past. We believe that the company has already put its infrastructure in place and should be able to generate superior returns going forward.
Satyam will be vulnerable to price movements of Satyam Infoway on Nasdaq. As is true for all infotech companies, Satyam has also seen a major PE expansion in the past two years. Even if there is no further PE expansion and the stock price moves up in consonance only with earnings growth, the stock will give handsome gains. We recommend a buy.