Result Highlights

Consolidated Results for the quarter ended June 30, 2007

* Revenue was Rs 18,302 million; a Y-o-Y increase of 26.8% and a sequential increase of 2.9%.
* Net Profit after Tax was Rs 3,783 million; a Y-o-Y increase of 6.9% and a sequential decrease of 3.9%.
* EPS was Rs 5.7, a Y-o-Y increase of 4.4% and a sequential decrease of 3.9%.

Growth across the service offerings:

Engineering services, Consulting and Enterprise business solution and Infrastructure management services grew by 14%, 15% and 36.4% respectively.

Billing Rate:

Offshore billing rates were up by 1.46% and onsite rates increased by 1.31% in this quarter, resulted into 1.1% improvement in blended rates. Management expects positive pricing momentum to continue in FY2008 also.

Margin:

During the quarter margin is declined by ~64 basis point sequentially. The management has guided 125 bps decline in the operating margins for FY08 from FY07 levels. The management indicated positive margin levers would be better price realization, improving offshore-onsite mix, improved subsidiary performance, operational efficiency, SG&A leverage and employee pyramid. Company had net forex loss of Rs 60 million - hedging gains of Rs 900 million and translation losses of Rs 960 million. The company has USD 750 million hedging position at the end of quarter.

Wage Hike:

16% offshore salary hike & 5% Onsite salary hike is expected in Q2 FY2008

Employee Details:

The number of associates including the subsidiaries and joint ventures increased by 2,795 to 42,347. The management is targeting to add 15,000 – 16,000 employees (gross) in FY2008, upgraded from the earlier guidance of 14,000-15,000 employees.

Attrition:

Attrition on a trailing twelve months basis fell to 14.9% from 15.7% in Q4 FY2007. Annualized quarterly attrition stood at 13.6% (marginally up from last quarter’s 13.21%) compared to 21.9% at the beginning of FY 2007.

CAPEX:

Satyam will invest about USD 80-100 million in FY2008.

Nipuna Performance:

Nipuna recorded revenue of USD 11.93 million and a net loss of USD 2.02 million in Q1 FY2008. The company guided revenue of USD 61 million for FY 2008, a growth of 60% over last year. The management expects Nipuna to report positive EBIDTA for FY08, however it is expected to report loss at net level.

Valuation:

We observe a greater portion of discretionary spending on technology being directed towards GDM approach. The management has indicated robust demand environment, which is also visible from upgrade in USD revenue guidance to 34-35.5%. The company announced couple of large engagements in past few months and suggested they are looking actively for few more engagements, which would improve business growth visibility. The company has announced salary hike from 1st July which would impact margin by ~350bps in Q2FY2008. The rising rupee, wage hike in Q2 and lower EPS guidance for the FY2008 (Indian GAAP) could have dragging effect on the stock in short term. We expect 2HFY08 to be better than H1FY08 in terms of growth in revenues and profitability. The stock is currently traded at ~19x FY2008E earnings. We maintain ACCUMULATE on the stock.