Satyam: Tough Environment, Cheap Stock

Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent note to clients on Satyam (SAY):

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Investment Conclusion. Based on lengthening decision cycles amidst the ongoing global financial crisis and lower interest income – offset partially by a currency-aided margin tailwind and 1Q09 overage – we are adjusting our estimates as follows: fiscal 2009 GAAP diluted EPADS to $1.47 on revenue of $2.555 billion (19% YoY growth) from $1.45 on revenue of $2.667 billion; and fiscal 2010 GAAP diluted EPADS to $1.45 on revenue of $2.727 billion (7% YoY growth) from $1.70 on revenue of $3.333 billion. Our model conservatively assumes no QoQ revenue growth in the next three quarters. Longer term, we believe that Satyam should deliver ~20% YoY revenue growth in fiscal 2011 and beyond. To reflect prevailing sentiment, we are also resetting our target price from $34 to $22. In 12-months, this would correspond to 15x forward EPS – a premium to the current depressed valuation. These aggressive cuts enable us to accentuate 1) an upward bias to our estimates; and 2) compelling valuation of only 10x forward EPS. Upon the return of a more normal environment, Satyam’s expanded process efficiency capabilities should lead to substantial transformational opportunities – including M&A integration, regulatory compliance, etc.

2Q09 Results. GAAP diluted EPADS of $0.39 vs. $0.30 a year ago on revenue of $652.2 million handily beat our $0.34 estimate on revenue of $650.0 million. Revenue was held back by unfavorable currency swings (-$17 million impact). Results included a $3.5 million forex hedging gain (+0.9 cent EPADS impact). Operating income advanced 47% YoY and exceeded our estimate by 13%. Highlights included 2.3% QoQ and 28% YoY revenue growth; currency-aided operating margin of 20.3% vs. 17.7% a year ago; meaningful DSO improvement; and fiscal 2009 guidance necessitating only a 4% reduction to our 2H09 EPS estimates.

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SAY shares are suitable for aggressive investors. In our opinion, principal risks include the following: U.S. slowdown; rising offshore salaries; appreciation of the Indian currency, which would translate into higher expenses incurred in rupees; correction in the Bombay Stock Exchange and/or U.S. markets; political opposition in the U.S.; and geopolitical uncertainty in the Indian subcontinent.

ANALYST CERTIFICATION
I, Ashish Thadhani, certify that all the views expressed in this research report accurately reflect my personal views of the subject companies. I certify that I have not and will not receive compensation with respect to the issuance of this report.

Comments

[punk_ash:]

thadani the great moron, the stock is tanking at around $2-3

Jan 07 02:37 AM

[Todd L:]

1 cent... Wow, this one just Enron'ed all over the place.

Jan 08 12:03 AM

[User 358738:]

This guy thadani must be on the take from Raju's. He had been gung-ho for years and always ignored the real risks and management quality. Even now he continues to favor some companies and ignores others - may be depends on who can give him something in return or am not sure what his rational analysis as been! He should be called a pimp..and not an analyst!

Feb 17 01:30 PM