Satyam Computer: Pressure from wage hike

The numbers from Satyam have been disappointing

Satyam Computer Services reported a decent 10 per cent sequential growth in revenues and a 11 per cent growth in operating profit.

However, it's important to note that around 73 per cent of the incremental revenues came from the top 10 clients, with the top client alone accounting for over 33 per cent of the total growth. Clients outside the top 10 grew revenues at less than 5 per cent.

The major disappointment was the announcement that the 18-20 per cent offshore salary hike effective October 1 would dent December quarter margins by 200-250 basis points.

Some other IT companies like Wipro have also given salary hikes of around 15-18 per cent, but in their case margins are expected to be protected through other measures such as an increase in utilisation.

Besides, in Satyam's case, even 'other income' is expected to be lower because of a drop in interest income and likely losses on forward cover in the rupee-dollar market.

As a result, earnings in the second half of the fiscal are expected to fall by about 1 per cent compared with the first half, despite an anticipated 11.7 per cent growth in revenues.

It's not that things were rosy in the first half either. Satyam's operating profit grew just 27.6 per cent in the first six months, less than half the growth recorded by the top three players.

Satyam's net employee addition of around 1,200 was not only much lower than expectations but also lower than the addition in the previous two quarters. The Satyam stock fell about 5.5 per cent as a result, wiping out the entire gain made after the excellent results announced by Infosys and TCS.

Bajaj Auto

Bajaj Auto's September quarter results were expected to be lacklustre because of a number of reasons - lower other income, higher tax rates, price cuts, higher input costs and a higher proportion of low-margin, entry-level bikes.

All of these fears came true, but to such an extent (net profit before exceptionals fell 14.4 per cent) that the results turned out to be worse than the most pessimistic estimates.

Bajaj's operating margin fell 164 basis points last quarter, against a 128 basis points increase in the June quarter. One of the reasons for this was a change in product mix - the proportion of three-wheelers to total sales was lower last quarter and the success of the CT100 meant that the proportion of entry-level bikes was higher.

But the big surprise was 444 basis points jump in raw material cost. Even compared to the June quarter, raw material cost rose 185 basis points.

One saving grace for the company has been a drop in "other" expenditure for the second consecutive quarter. But with the nation-wide launch of "Discover" this quarter, these expenses may rise from current levels.

The Bajaj stock did correct a bit, but it still gets a significant premium - it trades at 12.5 times FY05E compared to a PE of 10.25 for Hero Honda. Big expectations from "Discover" are still intact.

Guj Ambuja

The September quarterly results of Gujarat Ambuja reflects the upturn of the cement industry. GACL's consolidated net profit jumped 477 per cent last quarter, thanks mainly to better price realisation - realisations are estimated to have increased approximately 15 per cent in domestic markets and 40-45 per cent in export markets.

Meanwhile, higher diesel and coal prices have led to GACL's power and fuel bill surging 60 per cent. However, higher sales offset that rise and operating profit grew 155 per cent to Rs 189.35 crore.

Going forward, profit growth is expected to remain buoyant given the expected pick up in construction activity post-monsoons and an upsurge in cement prices in key overseas markets like the Middle East.

With contributions by Mobis Philipose and Amriteshwar Mathur