Satyam Computer - Investment Thesis

Company Description

Satyam is a leading global business and information technology company, delivering consulting, systems integration, and outsourcing solutions to clients in over 20 industries. It leverages deep industry and functional expertise, leading technology practices, and an advanced, global delivery model to help clients transform their highest-value business processes and improve their business performance.

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Key Investment Highlights

• Satyam has the lowest exposure to BFSI among the top 4 IT vendors; hence, it is relatively less prone to financial crisis
• Global financial crisis and market uncertainty would take a heavy toll on outsourcing – Clients may postpone project till the financial tsunami wanes
• Most undervalued stock among the top 4 IT vendors with significant upward potential
• Adverse movement of Euros and Pounds (getting stronger w.r.t. US dollar) will affect dollar revenue by 2-3%

Key Drivers

• One of the worst ever global financial crisis in the history with prolonged and global impact; Satyam has the lowest exposure to BFSI among the top 4 IT vendors.
• Lesser outsourcing revenues after bankruptcy and consolidation in the banking sector.
• Entered into a strategic partnership with FIFA, making Satyam the official IT services provider to the 2010 and 2014 Football World Cups.
• Expanded service delivery footprint by opening centers in Australia, Malaysia, China, Egypt and Brazil.

Sector Views

IT sector like overall economy is going through a period of uncertainty due to the global financial crisis. BFSI (Banking, Financial Services and Insurance) segment, which consists of more than 30% of IT companies revenues, would be worst affected. This makes IT sector extremely vulnerable because at present nobody knows whether the worst has come or is yet to come. The US and European economies might go into recession, putting further pressure on outsourcing industry. We may witness some downsizing by these firms to cut cost and reduce bench strength in the short run.

Key Risks

• Major economies such as US and Europe may go into recession
• BFSI segment which offer revenues more than 30% for most of IT firms will get even worst
• Increased competition from other IT firms; we saw HCL acquiring Axon and TCS winning some mega deals

		INFY	SATYAM	WIPRO
P/E (x)	FY08A FY09E	21.3 16.8	15.3 11.6	20.3 17.2
P/B (x)	FY08A FY09E	7.0 5.5	3.6 2.9	5.7 4.6
ROE (%)	FY08A FY09E	36.8 37.0	26.0 27.6	22.8 19.5

Satyam is undervalued compared to its peers Infosys and Wipro. We could see it has the lowest P/B among the three vendors (table above). Also, its PEG is 0.7 making it grossly undervalued. Given the uncertainty in the market but solid business model, I recommend investors to take a long term view of the stock and BUY on the stock.

Stock View

Maintain overweight (BUY)

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