Satyam: Difficult days ahead

It’s going to get worse before it gets better. In a sign of things to come, Satyam Computers says it now plans to hire about 8000-10,000 people this year, scaling back its recruitment plans from14,000-15,000. The Hyderabad-based tech firm has surprised the Street by saying it will post an earnings per share( in dollar terms) of $1.47-1.50, which means earnings will grow at a fairly healthy 17.6-20 per cent. That’s higher than earlier indications and has been prompted by prospects of operating margins improving by about 100-150 basis points. 

There’s nothing to celebrate though ; the improvement is coming not from better volumes or prices but from some cuts in selling and administration costs. In fact, the management is extremely cautious about the future and its assessment is reflected in the forecast for revenues (in dollar terms), which has actually been lowered by about 5 per cent. That is worrying because it means the top line will grow by just 21 per cent compared with 26 per cent estimated earlier. 

Not surprisingly, the management expects volumes to fall and also to lose some money on adverse cross currency movements. Satyam has a lower exposure to the banking and financial services space –the segment accounts for just about 20 per cent of its revenues —-and, therefore, it is less vulnerable to the global credit crisis than some of its peers. Nevertheless, it could lose some business in the space. Also, Satyam could face problems in the key consulting and enterprise planning segment, which contributes around 44 per cent to revenues.

Meanwhile in the September 2008 quarter, margins actually fell 110 basis points to 23.1 per cent because salaries were increased. That’s despite the depreciating rupee propping up revenues by 7.6 per cent sequentially to Rs 2,819 crore. Prices were slightly lower because of adverse currency movements; the management believes prices would remain at these levels for the next six months.

The firm’s net profit for the was up 6 per cent sequentially at Rs 581 crore. At the current price of Rs 266, the stock trades at a shade over 8 times its estimated FY09 earnings.