Satyam Computer: Wrong signals

Satyam Computer's guidance disappoints market

Satyam Computer's fourth quarter numbers disappointed the market, but investors were even more disappointed with the guidance that the management has given for FY07. So, it was not surprising that the stock fell over 7.2 per cent in Friday's trading to close at Rs 808 levels.

Satyam grew its topline by a strong 36 per cent in FY06 to Rs 4973 crore, becoming a billion dollar company. But the management says it would grow revenues by just 25-27 per cent in FY07.

Moreover, the earnings guidance of Rs 36-Rs 36.60 per share, is an increase of between 18-20 per cent over FY06, though when adjusted for Esop accounting, it would be slightly higher at around 23 per cent.

That is surprising in an environment, which other technology players agree, is good for business. Not only are Indian players able to bag deals, deal sizes too are increasing. But even in the March quarter, Satyam was able to grow its revenues for Q4 FY06 by only 3.8 per cent, way below the growth rates seen by the Tier-I players.

Moreover, the margin has improved by 60 basis points to 25.4 per cent because the recruitment mix was tilted towards freshers. The reason for the subdued margin and earnings outlook lies in Satyam's high attrition which has hit 19.2 per cent.

In a bid to retain employees, the company is offering increments of 18-19 per cent for offshore employees and 5-6 per cent for on-site employees. That would result in a drop in the margin of 100 basis points in the current year. The management does not expect any increases in billing rates but hopes to control expenses on sales and administration.

The good news is that Nipuna, its BPO subsidiary, has broken even in the March quarter, on full year revenues of $20 million. For FY07, Nipuna will see a revenue growth of 80 per cent to $36 million.

At the current price of Rs 808, the stock trades at nearly 22 times estimated FY07 earnings and is much cheaper than the Tier-I stocks.

However, with wage pressures unlikely to subside in a hurry, there is little cushion for any further downside in the margins. Moreover, the revenue growth outlook is none too encouraging. Satyam needs a couple of good quarters for investors to become more confident.

Biocon: Smart recovery

Biocon's March 2006 quarter results indicates that statin prices have shown signs of stabilising in the European market on a sequential basis, coupled with the rapid ramp-up in the company's contract research business.

As a result, Biocon's operating profit has grown 20 per cent y-o-y to Rs 60 crore in the March 2006 quarter. However, the operating profit margin fell about 55 basis points y-o-y to 28 per cent in the last quarter.

The weaker operating margin was due to material and power costs rising 22 per cent and a 37 per cent rise in other expenses.

Analysts highlight that other expenses grew in the last quarter due to a rise in R&D costs and one-time expenses incurred in the acquisition of Nobex's IP assets. The pricing pressures in the statins business resulted in the FY06 operating profit margin dipping 235 basis points y-o-y to 29.06 per cent.

Meanwhile, revenues in the company's bio-pharmaceuticals business grew 20 per cent y-o-y to Rs 157 crore in the last quarter. According to analysts, this was due to improved sales of insulin.

Also, it is understood that statin prices in Europe have shown signs of stabilising on a sequential basis, but on a y-o-y basis they were still lower. The contract research business grew a huge 70 per cent y-o-y to Rs 32 crore in the last quarter.

Over the next few quarters, Biocon's growth is expected to be powered once again by its insulin and contract research business.

The stock trades at 19.4 times estimated FY07 earnings and there is little room for further appreciation.

With contributions from Shobhana Subramanian and Amriteshwar Mathur