Buy Satyam Computer: CLSA

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Buy Satyam Computer: CLSA

CLSA research is bullish on Satyam Computer and has maintained buy rating on the stock.

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CLSA research is bullish on Satyam Computer and has maintained buy rating on the stock.

CLSA research report on Satyam

40%YY USD-revenue growth Satyam needs one quarter of 9.0-9.5%QQ USD-revenue growth to put it firmly on track for the 40%YY USD-revenue growth mark in FY08. Management meetings indicate an exceptionally strong order book for this year, boosted in no small measure by a series of large deal wins. While leading tech stocks have corrected 5-8% in the last week on the back of the subprime scare and WNS' negative report, our confidence in the space stays highest for Satyam. Financial services exposure is sector lowest at 24%, of which 8% is insurance, even as valuations have corrected to 17xMar08/14xMar09 earnings. BUY rating stays.

Exceptionally strong order book for FY2008

Satyam needs 6%CQGR in 2Q/3Q/4QFY08 to meet its 35.5%YY USD-revenue growth guidance for FY08. We note that in the last many years, the Sep quarter has matched the June quarter in growth metrics. One more quarter of 9-9.5%QQ revenue expansion can take Satyam to 40%YY USD-revenue growth in FY08, which will be sector leading among the India listed vendors (CTSH is ahead). Management commentary during investor meetings last week indicates an exceptionally strong order book for FY08. Large deal wins including GM, Nissan, Qantas, Applied Materials and Citi have played a role, and while two of these deals have entered the top-10 client list, further ramp-ups from other wins lie ahead. As per Satyam, there are 20 large deals in play currently where Satyam is involved, each greater than USD50 million in size; and Satyam is in "late stage negotiations" in 10 of these.

Pricing and operations: some work done, but more scope ahead

Satyam has several powerful margin levers still at play, countering the impression that the creditable improvements in its operational metrics (utilization, employee attrition, offshore shift) in the last few quarters have exhausted available margin buffers. For example, 48% of manpower is less than 3 years of experience, c.f. 60% for Infosys. Pricing, by management's own admission, is 15-20% below peers such as Infosys, especially in onsite. The company had guided for 2-3%YY like to like pricing improvement in FY08, of which 1Q pricing came 2%YY better than FY07. We believe that Satyam will most likely beat its pricing targets for this fiscal year.

Stock suffering from sector-wide jitters, but operations look strongest

While the stock has done materially better than its frontline peers this year (11%- 21% outperformance, 6million), Satyam has underperformed against the broader markets, YTD. Within our coverage universe, Satyam stays the only BUY rated stock as we find superior revenue momentum and multiple operational initiatives driving an improvement in quality of financials. With subprime exposure @  approx zero, and relatively lower exposure to financial services (24% including insurance which is 8%), Satyam is also well placed given the current concerns around IT spends from BFSI clients. Valuations at 17xMar08/14xMar09 are attractive.