Satyam: Beating estimates

Satyam's EPS guidance implies a dip in margins

Satyam's March quarter results were way ahead of market estimates. Revenues grew by seven per cent sequentially, higher than most other software companies.

This was driven by a 12 per cent growth in offshore volumes. Higher offshore volumes generally result in better margins, but Satyam's operating margin was flat last quarter at 25.5 per cent.

This was mainly because there was a 1.7 per cent decline in average rupee rates last quarter, which hit margins by 60 basis points. In fact, the company has done well to grow operating profit by 7.6 per cent.

Net profit grew by as much as 22 per cent sequentially, thanks to a big jump in other income. In the December quarter, much of the company's other income was wiped out because of a forex loss of Rs 22.66 crore.

Last quarter, losses on account of exchange fluctuations were just Rs 2.8 crore, which led to the big jump in other income - from Rs 2.6 crore in the December quarter to Rs 25.3 in the March quarter.

Nevertheless, the March quarter profit represents a high base, and the company expects earnings to decline by about 9-10 per cent in the June quarter.

This is on account of the salary hike that will be in effect since April this year, which will hit margins by about 300 basis points. For FY06, Satyam has estimated a growth of 26-28 per cent in rupee terms for its consolidated revenues in FY06.

Also, it expects subsidiaries (including Citisoft which it acquired last quarter) to account for about 4 per cent of revenues in FY06. This means that the core software services business is expected to grow by 23-25 per cent.

Its EPS guidance implies a decline in margins for the year, which is again explained by the salary hike. The fact that operating margin would decline from the already low levels of around 25 per cent is a concern.

Besides, attrition continues to be at high levels of about 17 per cent, and wage pressures persist.

These are some of the reasons Satyam's forward PE of about 14 times continues to be lower than top tier companies, which trade at 18-21 times estimated FY06 earnings.

Corporation Bank

Corporation Bank's Q4 net profit was expected to be lower on a year-on-year basis, because the bank had written back some provisions in Q4 FY 2004, and provisions were therefore negative in that quarter.

In contrast, provisions were Rs 93 crore in Q4, FY 2005. Net profits therefore fell 10 per cent to Rs 107.57 crore. Operating profit, however, was higher by 43.8 per cent.

The fourth quarter banking results were a test of how far banks had succeeded in overcoming the problems caused by the loss of easy money from treasury gains.

That shortfall was supposed to be made up by higher net interest income, on the one hand, and lower provisions, on the other.

So how has Corporation Bank fared on these parameters? Net interest income rose to Rs 286 crore compared to Rs 245 crore in Q4 FY 2004, a rise of 16.7 per cent.

Interest expended as a percentage of interest earned went down to 50.3 per cent in Q4 from 55.5 per cent a year ago, implying a rise in spreads.

However, Corporation Bank's operating and net profit in Q4 was much lower than Q3 levels, mainly because "other income" was much lower. Income from treasury operations fell to Rs 16 crore from Rs 69.60 crore in Q3, but that wasn't the only reason for the fall in operating profit----both revenues and profits from other banking operations also fell.

What's more, provisions and contingencies also went up in Q4 compared to Q3. On the positive side, net NPAs are down to 1.12 per cent.

Shoppers' Stop: It's best to window shop

Shoppers' Stop's IPO comes at a time when the retail sector is booming and should continue to do so. The company is scaling up its operations from 0.8mn square feet and plans to have 2.5mn square feet by 2007.

By way of comparison, Pantaloon has 1.5mn square feet of shop space while Trent has 0.5mn square feet.

Approximately 70 per cent of Shoppers' merchandise constitutes apparel. However, 45 per cent of the consumer's wallet is spent on food, and Shoppers' will get a share of the food business only when it finally opts to buy a stake in Hypercity. But its competitors are already in food retailing.

The conversion ratio, which is the ratio of customers who actually buy to total customers who walk in, has been falling because more stores are now part of shopping malls where customers tend to do more window shopping.

However, if more customers are buying, as will almost certainly happen, that should not matter.

Of the total revenues almost 80 per cent comes from branded products, the remainder coming from store labels. Store labels are far more profitable though, with margins being around 50 per cent higher than that for branded products, which in any case are available across chains.

Shopper's competitors rely much more on store brands. Since this ratio is unlikely to change in a hurry it will be difficult to grow margins significantly though scalability should give them a boost in the long term.

Shopper's operating margins today are at 7.5 per cent compared with 9 per cent for Pantaloon and 6.5 per cent for Trent.

The price band of Rs 210-Rs 250 implies a market capitalisation to future sales of between 1-1.25 (at Rs 210 and Rs 250), compared with 1.1 times for Pantaloon and nearly 2 times for Trent.

At the top end of the band therefore, the stock would be expensive. At the lower end it would be fairly valued.

With contributions from Shobhana Subramanian and Mobis Philipose