Satyam Computer Services: Results Begin To Show

The key challenge facing the major software services companies

is to be able to differentiate their offerings and therefore be able to maintain

their margins in a market place that is increasingly getting price conscious.

Top Indian companies have been trying to move up the value chain by offering

higher end services such as ERP implementations or consulting services. Others

are increasing the range of their service offerings so that they are able to

meet all their client requirements and therefore avoid competition. Indian

companies are also building partnerships with software product companies as well

as management consulting firms so as to reach more clients and also position

themselves as technology consultants rather than mere vendors of programming

skills. In the same direction, companies are also adding muscle to their sales

teams to ensure better client management.

These investments may not immediately result in improved margins

or even faster revenue growth but in the long term will create a major shift in

the way Indian software companies are perceived and the way they do business.

Hyderabad-based Satyam has long been identified as a low cost vendor. In the

recent past, the company has been trying hard to move up the value chain with

reasonable amount of success. While the company is still behind some of its

peers in this direction, the progress made until now is encouraging and has

already made a positive impact on its margins.

Founded by its current chairman B Ramalinga Raju and managing

director B Rama Raju in Secunderabad, Satyam Computer Services' spectacular

rise began in 1994 when it posted excellent financial performance.

Established on 24 June, 1987, in the past six years, Satyam's

total income has grown at a CAGR of 59% to Rs 3,546.8 crore whereas its net

profit has risen at a CAGR of 56% to touch Rs 750.3 crore. Satyam's current

equity stands at Rs 63.3 crore, with promoters holding 17%, institutional

investors holding 64%, Indian public holding 6%. The balance 13% stake is held

by others. The company offers a wide range of information technology consulting

and related services, including software development, managed IT services,

engineering design, data warehouse development, and systems integration.

Satyam closed the year ended March 2005 with revenues of Rs

3,520.8 crore as compared to Rs 2,560.5 crores in the previous year, a healthy

growth up 38%. Net profits for the same period were Rs 711.6 crore, registering

a growth of 39% as compared to Rs 513.4 crore in the previous fiscal year.

Satyam's export income from software services for the same fiscal amounted to

Rs 3,387 crore.

During the year, Satyam bagged a three-year contract from

Nestlé to provide SAP application support for their GLOBE Business Excellence

Program worldwide. The company also signed a $8 mn contract with the New Bangkok

International Airport-Airport Information Management System (NBIA-AIMS) to

integrate the various systems using the web methods integration platform and to

design and develop the information kiosk for the entire airport, which is

expected to be deployed before June 2005.

Satyam's performance for the second quarter ended September

2005 saw considerable improvement in margins. Revenues grew 9% sequentially to

Rs 1,155 crore, as compared to Rs 1,058.7 crore and a 34% growth on y-o-y basis.

The revenue earnings of this quarter were well above the estimates given by the

company. Revenues from onsite activities contributed 56% of the total revenue

earned during the quarter due to higher growth of packaged software

implementation revenues and the balance 44% was contributed by activities

offshore. North America contributed 67% of the revenues earned during the

quarter, a major chunk, whereas Europe contributed 18%, Japan and the rest of

the world contributed 1% and 14% respectively. The net profit of the company for

the same period amounted to Rs 237.3 crore up 25% as compared to Rs 190.2 crore

in the immediately preceding quarter. GE, Satyam's largest client contributed

9% of the total revenue earned during the quarter with its top ten clients

contributing 39% of the total revenue.

During the quarter, the company formed a number of alliances to

move up the value chain and to get closer to its prospect base. The alliances

with Mainstay Partners, a boutique management consulting firm, was noteworthy,

whereby the two companies would engage in technology evaluation services. Satyam

and Iona Technologies have also formed a partnership to jointly offer web

integration services in global markets. In a major win, the company got

appointed by the World Health Organization to implement its Global Managament

System. Satyam also announced a tie-up with a publishing solutions company for

providing content and data solutions to the publishing vertical.

The employee strength went up by 1,977 to touch 22,482. The

company acquired 32 new customers during the September 2005 quarter, taking the

total number of active clients to 429.

Going

ahead, the company expects revenues between Rs 4,700 crore and Rs 4,718 crore,

for the full fiscal 2006 with a profit growth of over 30% for the year. Given

the company's strong showing in the last quarter and the initiatives on value

addition to clients, it believes that the revenue growth and profit targets

could well be overachieved for the full year.

Satyam currently trades at Rs 628 discounting March 2006 EPS by

20 times. We believe that given its improving margins and steady revenue growth,

the company will continue to outperform its peers. Out Performer.

Sushanto Mitra

The author is the founder of Technology Capital Partners The views reflected

here are of the author and not of this publication. No liability is accepted for

losses based on the information presented here