Satyam's Projected EPS Growth Overtakes Infosys, Wipro

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

• Investment Conclusion. Based on continuing volume and price momentum, we are raising our estimates: fiscal 2008 GAAP diluted EPADS to $1.24 on revenue of $2.122 billion (45% YoY growth) from $1.22 on revenue of $2.080 billion; and fiscal 2009 GAAP diluted EPADS to $1.45 on revenue of $2.821 billion (33% YoY growth) from $1.42 on revenue of $2.727 billion. At this time, we are also introducing a fiscal 2010 GAAP diluted EPADS estimate of $1.65 on revenue of $3.668 billion (30% YoY growth). Our estimates imply 33%/17% compound revenue/EPS growth in calendar 2007-09 – after factoring a one-time jump in the tax-rate due to expiration of prior tax benefits – second only to Cognizant among (U.S. listed) offshoring majors.

  Given investor apprehension over the U.S. IT spending environment (60.0% of revenue), we are trimming our target price from $37.50 to $36. In 12-months, this would correspond to 20-25x forward GAAP diluted EPADS of $1.60 – a premium to the current valuation (18-19x). Meanwhile, differentiating attributes include a top-rated ERP Package Implementation practice enabling client engagement at a more strategic level; 180+ Fortune/Global-500 relationships plus a leading presence in the Manufacturing sector; and recent growth across newer clients and higher value services that are translating into a meaningful margin lever – with positive valuation implications.

• 3Q08 Results. GAAP diluted EPADS of $0.32 vs. $0.21 a year ago on revenue of $562.9 million beat our $0.31 estimate on revenue of $540.2 million. Operating income rose 38% YoY and exceeded our estimate by 5%. Highlights included 50% YoY and 10.5% QoQ revenue growth vs. our 44%/6.0% expectation; gains across key operating metrics such as billing rates (unprecedented 6% YoY growth) and employee attrition (sixth straight quarter of improvement and among the best in the industry); four wins valued at $50+ million each; and a branding coup as the official IT services provider to the FIFA World Cup in 2010 and 2014. During the quarter, Forrester ranked Satyam the #1 Indian provider of SAP offerings while IDC acknowledged its ERP practice (Oracle and SAP) as among the largest worldwide.
• Takeaways. Satyam recorded durable growth in the Americas region (13.5% QoQ and 40% YoY) and Financial Services segment (3.9% QoQ and 31% YoY). Management conveyed the following outlook: Satyam currently has visibility into the 2008 IT spending plans for ~85% of its clients – in line with prior years; client budgets are expected to increase 5-6% YoY while greater clarity on the offshore allocation should be forthcoming by quarter-end; the CEBS segment (45.0% of revenue) is positioned to benefit from enduring demand for consulting-led business solutions, which are not necessarily short/discretionary projects; the number of $50+ million deals in the current pipeline is 50% higher vs. a year ago; instances of large project cancellations have been rare in the industry; clients continue to grant price increases based on a proven value proposition and rising wage costs; revenue growth is being driven increasingly by non-U.S. regions (40.0% of the total vs. 35.7% a year ago); and while it would be imprudent to dismiss a slowdown in decision making, any such scenario would likely be followed by urgent initiatives to address operating efficiency. Fiscal 2008 guidance is based on 45% YoY revenue growth, no further billing rate improvements (conservative in our view), annual salary increase (effective July 1) averaging 16% for offshore staff and 5% for onsite, 50-70 bps decline in the operating margin primarily on account of rupee appreciation, and an exchange rate of INR 39.30 per U.S. dollar vs. 39.50 in October.

  This week, Satyam agreed to acquire Bridge Strategy Group for $35 million in cash (2.1x revenue). Formed in 1998, Bridge is a Chicago-based provider of strategy and management consulting services to diverse clients. It is differentiated in the marketplace by a practitioner-led model involving small but highly experienced teams. The addition of its 36 consultants should enhance Satyam’s transformational offerings and high-end presence.