Satyam: Not By Price Alone

The success of the Indian software services sector has usually
been ascribed to the wage differential between India and the West. However, the
pricing advantage is increasingly being diluted by rising salaries in India,
and, more recently, by the falling dollar. Yet, the Some companies have focused
on particular niches, others have looked at acquisitions and alliances to reach
better paying clients while still others have looked at internal processes and
systems to nullify the impact of the disappearing wage differential.

Among companies that have been successful in surviving and even
prospering despite the challenges of bigger competitors as well as the rising
salary bills is Hyderabad-based Satyam. The company has been looking at
acquisitions and alliances to develop a better reach to clients and domain
expertise, and consequently improve billing rates.

Established in June 1987 by its founder and current chairman, B
Ramalinga Raju, Satyam Computer Services offers a wide range of IT consulting
and related services including software development and maintenance, consulting
and enterprise business solutions, extended engineering solutions and
infrastructure management services.

The Secunderabad-based company renders its services to
industries such as banking and finance, insurance, manufacturing, telecom,
infrastructure, media, entertainment, semiconductor, healthcare, retail, and
transportation. Satyam's current equity stands at Rs 178.9 crore with
promoters holding 8.8%, institutional investors holding 58.8%, the Indian public
holding 12.8%, and the balance 19.5% of the stake is held by others including
foreign shareholders. Ramalinga Raju did his MBA from Ohio after he completed
his B.Com from Loyola College at Vijayawada. Prior to setting up Satyam, Raju
was engaged in the textile spinning and construction business apart from other
family businesses.

Satyam's revenue for the year ended March 31, 2007 from
services stood at Rs 6,485 crore, a growth of 35.3% as compared to Rs 4,793
crore in the same period last year. Net Profit for the period stood at Rs
1,404.6 crore, an increase of 42% from Rs 989.3 crore in the same period last
year.

During the year Satyam Computer Services signed a seven-year
multi-million dollar contract with Qantas, an Australian airline. The agreement
covers application development and maintenance services for over 150
applications across a wide portfolio of technologies. During the period it
established an R&D hub in Singapore to test and develop applications. The
company also collaborated with Microsoft to provide Business Intelligence and
Data Warehousing facilities in Singapore and Shanghai. Satyam formed an alliance
with Austin, Texas-based Planview, an enterprise portfolio management software
organization. It also formed an alliance with GigaSpaces Technologies to provide
end-to-end solutions for service-oriented architecture.

Satyam partnered with EPiServer, a Swedish content management
and portal software company. It entered into a strategic partnership agreement
with NNIT, Denmark's consultancy in IT development, implementation and
operations.

During the fourth quarter ended March 31, 2007, revenue from
services stood at Rs 1,779.1 crore, an increase of 35.4% from Rs 1,313.6 crore
on a y-o-y basis and an increase of 7.1% from Rs 1,661.1 crore on a sequential
basis. Net Profit stood at Rs 393.6 crore, an increase of 38.3% from Rs 284.6
crore on a y-o-y basis and an increase of 16.7% from Rs 337.2 crore on a
sequential basis.

During the quarter Satyam added 35 new customers including five
Fortune Global 500 and US 500 customers resulting in the number of active
customers during the quarter stand at 538 as compared to 469 in the same period
last year. Satyam ended the quarter with total employee strength at 35,670, an
addition of 1,265 associates including 600 trainees for Q4 '07. The number of
associates including those of subsidiaries and joint ventures stood at 39,552.

During the quarter Satyam signed a five-year contract with
Applied Materials to provide application development, maintenance, and support
plus business transformation core technology services through a managed services
delivery model.

For fiscal 2008 the company expects a revenue growth in the
range of Rs 7,793 crore to 7,916 crore. We believe that given the increasing
network of alliances and acquisitions the company has the ability to grow
revenues without seriously impacting margins.

Satyam currently trades at Rs 467.8 discounting March 2008 EPS
by 24.8 times and March 2009 EPS by 20.7 times. With stable margins and strong
topline growth we believe that the company continues to remain in the investment
zone. BUY

Sushanto Mitra

The author is director, Techcap India

sushanto@techcapIndia.com

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