Satyam Computers

Despite in-line financials, 1Q09 results disappointed on operating metrics. With management holding on FY09 guidance versus the Street's expectations of an increase and given macro concerns, we expect the stock to remain range-bound in the near term.

1Q09 results - financials broadly in-line
Consolidated revenues, adjusted for FX gains, grew 1.7% qoq to US$623.8m (8.5% in INR terms), lower than guidance and our estimates. IT services grew by 2.1% in US$ terms while BPO was down 37% qoq as a large animation project was not renewed and a large client pulled out. Consolidated EBITDA margin was up 133bp qoq to 24.1% (195bp ex RSU charges), in line with our expectations. Reported PAT was up 17.3% qoq at Rs5.5bn, including Rs363mn of FX losses.

Sparks missing in operational metrics too
IT services volume growth fell to 3% qoq, lowest over last five years, while blended realization was down 0.2% qoq, after increasing over last four qtrs. Net headcount addition at 651 was below our estimates. Management maintained the 14,000-15,000 gross addition guidance. This could imply lumpiness in addition over 2Q-3Q and pressure utilization, in our view. PI revenue growth slowed down to 1.3% vs 12% CQGR in FY08. Company does not see this as a trend and expects growth to pick up. Positives were 3 large deal wins and continued trending down in attrition.

FY09 guidance revision - expectations mismatch
No raise in FY09 US$ guidance contrary to market expectations. At 4.5% revenue guidance for 2Q, Satyam would need to grow 5.7% qoq in 2H09 to meet FY09 guidance. We believe this is achievable, but do not see outperformance given current macros. However, with currency helping margins in FY09, outperformance to Rs32.3 guided FY09 EPS is possible.

Buy maintained. Valuations support downside risk
We broadly retain our forecasts, adjusted for actual 1Q09 results. But changes in FX and tax assumptions push our EPS estimates by 8-14% for FY09-10F. We keep our TP at Rs510, valuing the stock at 13x FY10F EPS (vs 15x earlier). We expect near-term re-rating to be capped by the dissapointment on FY09 guidance and subdued operational metrics.