Satyam's 42% topline growth for FY02 is the best among the software majors. The net profits excluding extra-ordinary items have grown by a strong 55%. However, the company's fast deteriorating operating margins are a cause for concern.
Though the average billing rates for FY02 were almost same as FY01 billing rates, the pressure is evident from the movement in quarterly numbers. However, it is interesting to note that while most of the companies from the sector have been increasingly taking on offshore projects, Satyam's onsite-offshore mix has consistently changed in favour of onsite projects during FY02. The contribution of revenues from onsite projects increased from 41% in 1QFY02 to 50% in 4QFY02. Consequently, the share of offshore projects in revenues declined from 59% to 50%. The decline in contribution from offshore revenues could be the reason for the company witnessing a three-percentage point decline in operating margins. The company expects the decline in operating margins to continue in FY03.
Satyam's FY02 result.
While the contribution from different geographies did not change significantly for 4QFY02 (compared to 3QFY02), for the full year, Satyam managed to notably decrease the revenue concentration from the US geography. This was because the company more than doubled its revenues from Europe. It's dominant geography, the US, grew at 34%, higher than the industry growth rate. Growth in revenues from Japan was however moderate at 17%. In 4QFY02, the company started its operations in China and has plans to establish a software development centre in the country.
The revenue growth for 4QFY02 mainly came from package implementation. With slowdown in the economy in FY02, companies concentrated on getting the most out of their existing IT systems rather than going in for new ones. Many companies focused on maintenance and integrating existing IT systems by implementing middleware solutions that help disparate applications talk to each other. Satyam and other software companies from India saw steep growth in demand for package implementation and made the most of it.
|Software design and development
|Packaged software implementation
|Engineering design services
However, going forward, increased exposure to the area is a cause for concern, as implementation skills are very package specific. In a world where technology is changing so rapidly, it is not uncommon for packages to go out of 'fashion'. Revenues from maintenance almost doubled during the year. However, decline in revenues from engineering services was unexpected considering the fact that other companies have seen a strong growth in revenues from these services.
Revenue growth from insurance companies was a pleasant surprise. Insurance companies in the west are still reeling under the impact of the Sep 11 attacks. In 4QFY02 revenues from this vertical grew significantly. Satyam added West Bend Mutual Insurance and one of the largest life insurance companies in the US as its clients during 4QFY02.
|Banking and finance
However, for the year it was the growth from the manufacturing vertical that stood out. Satyam’s exposure to this vertical is easily one of the highest from the Indian software industry. The company also added clients from the healthcare vertical that has taken the fancy of Indian software companies. The company added 24 new clients in 4QFY02 (27 in 3QFY02)
Satyam too is joining the bandwagon and planning to foray into the business process outsourcing (BPO) domain. Satyam plans to launch a subsidiary in the BPO domain providing services in financial back office processing, transaction processing and call centres.
Undoubtedly the company has performed well in a challenging year. The company is mending its ways probably this will result in improved valuations for the company going forward.