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DSPML reinstates coverage of Satyam, gives it 'intermediate buy'

NetScribes / Rajiv Banerjee

Global investment banker DSP Merrill Lynch Ltd has reinstated coverage on Satyam Computer Services Ltd with an intermediate buy recommendation on the scrip. A well-balanced mix of services, flexible strategies by management and attractive valuation are the factors prompting the positive recommendation.

"The stock is at an attractive P/E of 13 times the estimated fiscal 2002 earnings and a PEG of 0.28 as compared to peers like Infosys's and Wipro's of over one. Its ADR trades at 29 times (peers at 42-60 times), at a premium of 15 per cent to local scrip," said the DSPML report.

Satyam, the fourth largest software exporter, provides end-to-end information technology solutions to Fortune 1000 companies worldwide. The company has over 300 customers including GE, State Farm Insurance, Ford, Caterpillar, NCR, Sony, Citibank and Selective Insurance.

The repeat business in the fourth quarter of fiscal 2001 was 83 per cent. Satyam has dedicated offshore centres for some large clients such as Ford and GE to offer exclusive services. This according to the DSPML report lends more predictability to revenues.

The report said that about 23 per cent of Satyam's revenues arise from the maintenance nature of services that can lend stability to its business amidst the current demand uncertainty. At the same time, the company has been moving up to higher value added services like e-business services, telecommunications, embedded software, package software implementation and engineering services.

"We estimate these to make up 45 per cent of its revenues in the fourth quarter of fiscal 2001. It is in transition, from being a code developer to a solutions provider," the report stated.

A diversified domain mix across insurance (16 per cent), banking (21 per cent), manufacturing (20 per cent) and engineering and telecom at 8 per cent each, also provide a balance in the current scenario. Lower exposure to the weaker telecom vertical vs peers such as Wipro (at 25-30 per cent), HCL Technologies (estimated at over 45 per cent) and Infosys (about 17 per cent) is also an added advantage.

The DSPML report was optimistic on the company strategy of entering into strategic joint ventures and alliances with global corporations, which would enhance Satyam's customer relationships and IT capabilities.

Satyam has entered into JVs with GE Industrial Systems, Venture Engineering, TRW, Computer Associates and Idea EDGE.

In addition, Satyam has established technology alliances with Siebel, SAP, Microsoft, Oracle, I2, and MIT, to name a few. It has also tied up with Microsoft Federal Consulting Services and Anderson Consulting to jointly develop solutions for public sector customers in the US.

Satyam's low billing rates also act as a cushion in the current sluggish demand scenario as it limits the risk of downsides. Satyam's billing rates are historically 20-25 per cent below peers such as Infosys and HCL Technologies, due to a volume driven business policy.

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