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Citigroup revises Satyam target upwards

February 9, 2007

In a research report released minutes ago by Citigroup equity research, they have maintained a BUY recommendation on Satyam Computers Ltd and revised the price target upwards to Rs 582 from Rs 510, 20% appreciation available from current levels.

3Q07 reported numbers were in-line with consensus expectations – however, considering that restricted stock unit (RSU) charge was deferred until next quarter, the results were below expectations.

3Q margins were boosted by seasonal/one-off items like lower leave encashment charges (down from Rs350m to Rs100m QoQ) and lower gratuity (down from Rs110m to Rs30m QoQ). All these seasonal factors reverting to normal levels and introduction of RSU charges will restrict any margin improvement in 4Q.

Satyam’s top-line growth story remains intact with good client wins and strong hiring of ~47% LTM, we believe that revenue outlook for FY08 remains strong. Margin pressures are likely to
continue. Despite factoring in a 150bp improvement in pricing in FY08, the full impact of RSU and wage hikes will result in a margin decline of ~100bps in FY08.

M&A story buried: Satyam has clearly stated in the investor release that it is not looking to get acquired [Speculators bought rumors of CapGemini BUYING out Satyam due to low promoters stake in the company], the M&A story gets buried.

Satyam is expected to report an EPS of Rs 25.18 and Rs 30.23 for FY08 and FY09. After the below-expectation quarterly performance, Satyam is back to a 28% discount to Infosys (vs. 22% before Satyam’s 3Q results). Our target price builds in a 25% discount to Infosys.

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