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UBS Warburg upgrades Satyam to 'strong buy'

NetScribes/Ganesh Ramamoorthy

UBS Warburg Securities has upgraded Satyam Computer Services to 'strong buy' from 'buy' after the company reported a sharp rise in profit margins for the December quarter. The scrip was trading at Rs 380.30 on the BSE in Thursday afternoon trading, up Rs 1.60 over its previous close, while the BSE IT index was down almost 1 per cent.

UBS Warburg has put a 12-15-month price target of Rs 600 for the Satyam scrip. "The discount to Infosys at current valuation is around 55 per cent, which we believe should come down close to 35-40 per cent. Hence, even in a sector weakness situation, we expect Satyam to give relative performance of 35-40 per cent from the current levels," said UBS Warburg analyst Sujit Sahgal in a report dated January 10. UBS Warburg downgraded Infosys to 'hold' from 'buy' on the same day and revised its 12-15-month price target to Rs 8,250.

The brokerage has also upgraded Hughes Software Systems to 'strong buy' from 'buy'.

The upgrade on Satyam follows a day after the company announced a 142 per cent growth in net profit to Rs 875 million and an 87 per cent growth in total sales to Rs 3.3 billion for the December quarter. During the quarter, Satyam's operating profit margin grew to 39.3 per cent from 37.1 per cent a year back. Without considering the non-operating income, the margin would have improved to 37.8 per cent over 36.8 per cent.

UBS Warburg attributed the rise in margins to the growth in billing rates, increased offshore revenues, and higher utilisation rates. Onsite billing rates grew 11 per cent quarter-on-quarter, while the offshore billing rate grew 3.44 per cent, and project onsite rates grew 4.6 per cent. Comparably, the quarter-on-quarter offshore billing growth rate in the September quarter was at 2 per cent.

Also, the offshore utilisation rate (excluding training) holds the key at a level of 78.85 per cent - an increase over the year-ago period's 78.78 per cent. The onsite rate too has increased to 90.25 per cent from 85.4 per cent. Also, Satyam's offshore revenues increased to 57.5 per cent in Q3 compared with 52.3 per cent in Q2.

"The above three drivers, combined with SGA efficiencies, have led to improving margins," Sahgal said. While an increase in offshore revenues could indicate that offshore billing rates have increased, Sahgal said actually the reverse has happened. "Onsite billing rates growth has been significantly higher than the offshore growth," he said.

Satyam's export revenues of Rs 3.19 billion is about 4 per cent higher than UBS Warburg's expectation of Rs 3.06 billion, while its net profit is about 9.4 per cent higher than UBS Warburg's estimate of Rs 800 million. But though Sahgal is bullish on Satyam's business, he remains cautious on the sector for the next 3-6 months.

"Compared to Infosys, Satyam has less of sequential metric problems due to its lower billing rates, recent adoption to floor rates, new matrix structure of organisation, and has a very low dot-com or onsite exposure. So, we expect Satyam to beat the general industry concerns over the coming few quarters. But there are too many balls in the air - onsite business, salary pressures - which may yet cause a disappointment in the second half of fiscal year 2001," Sahgal said.

Satyam has said that it is not seeing any problem in its offshore business and billing rates, although onsite volume and price may come under pressure. Satyam is hoping to firm up its numbers in February as it feels that offshore outsourcing is picking up - four Fortune 100 companies are currently in India scouting for 4,000 man-years of work.

"We agree with the broad concept of increase in offshore outsourcing, but also believe these contract take a long time to start and hence there could be lag till they build out," Sahgal said.

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