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Satyam: Showing signs of strain

Suresh Krishnamurthy

THE second quarter performance of Satyam Computer shows signs of strain from the adverse business climate in the US, which accounts for 77 per cent of its business. Operating profit (excluding other income) has registered a marginal decline in the quarte r ended September 2001 compared to the earlier quarter ended June 2001.

There are other disconcerting factors. First, the share of onsite revenues has increased noticeably from 41 per cent in the first quarter to 45 per cent. Second, client concentration has increased with top ten customers accounting for 52 per cent of reve nues, up from 48.4 in the first quarter. In addition, the number of employees has declined by 185.

On the positive side, Satyam has reported a 4.5 per cent growth in software exports over the quarter ended June 2001. In addition, 24 new clients have been added. However, Satyam has not given details regarding the pressure on billing rates. Satyam has a lso not provided details such as cash flow statement, balance sheet and profit & loss account. These details were made available in the case of the first quarter financial performance.

Importantly, the guidance for the next quarter is also a cause for concern. Satyam has said that the operating profit margin for the following quarter would be between 32 and 33 per cent. This would be lower by two percentage points than that recorded du ring the quarter ended September 2001. Importantly, the target for per share earnings for the following quarter has been fixed between Rs 3.2 and Rs 3.4. This indicates the profits would be lower than even that recorded in quarter ended June 2001.

There seems to be a degree of unease on the cashflow front as well. Satyam has indicated that it generated free cash flow of Rs 102 crore. In the first quarter Satyam generated cash flows of Rs 152.75 crore and spent Rs 17.06 crore on fixed assets. This produces a free cash flow of around Rs 135 crore. This suggests that there may have been further financial support to its loss-making subsidiaries during the quarter under review. Lending credence to these apprehensions is the statement by Satyam that it would no longer infuse cash into Satyam Infoway (Sify) and limit future cash support to Vision Compass, another loss-making subsidiary at Rs 2.5 crore.

In this backdrop, Satyam's move to sell stake in Sify will be closely watched. So would be the purchase of Sify's software business at a possible valuation of around Rs 33 crore. However, most of the negative sentiment will get pushed to the background i f Satyam is able to get a good price for its stake in Sify.