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Satyam: Analyst meet extracts - Views on News from Equitymaster
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Satyam: Analyst meet extracts
Sep 18, 2007

Satyam recently held its analyst meet in Mumbai to provide an update on the business momentum and future growth prospects. Here are the key extracts. On business momentum
Satyam maintained that there is no change in the near-term outlook for the business. The company has been able to increase its billing rates and has a healthy order book. The company has won many large deals in the recent past, which should account for a healthy volume growth.

On possible US slowdown
Satyam maintained that they are closely watching the situation unwinding in US but as of now its business as usual. The company has not seen any impact as of now on account of the difficulties in the US and even if it happens, the company is confident of managing it as over the years, Satyam has gained flexibility in managing clients and geographies.

Growth catalyst and new opportunities
For future growth, the company will be concentrating on engineering and R&D services. The company is extensively focusing on R&D offshoring, an area where Satyam is no more than a beginner. In case of engineering services, the market size of offshorable engineering services would be US$ 15 bn by FY12 (Source: Booz Allen Hamilton), Satyam has set a very aggressive target of US$ 1 bn in revenues by FY12 from this space. Satyam currently derives about US$ 90 m from engineering services. If it has to achieve its target of US$ 1 bn by FY12, then it will have to grow its engineering revenues at a CAGR of 61.5% from FY07 to FY12, which we believe is very aggressive. In case of new technology offerings, the company plans to focus on mobile computing and digital convergence.

On newer market and geographies
Satyam, like other companies, will be reducing dependence on US markets. Currently, the company derives about 65% of its revenues from the US markets. In Europe, the company is focusing on UK, Germany, France and Belgium. As a matter of fact, the Europe segment is growing faster than that company.

On Discretionary and Non-discretionary spending
Satyam maintained that high-growth services at the moment continue to show traction and the company so far has not seen a slow-down in such services. For Satyam, services such as business intelligence (BI) and IT consulting are more discretionary in nature.

Our conclusion
The company maintained that the US slowdown could also be beneficial for Indian IT companies, as the offshoring will increase. We believe that there are two views available on this. While one party could say that business will increase as the offshoring will increase thereby giving more volumes, we believe that higher volumes could be set off by a commensurate decline in billing rates like the one which happened in technology led slowdown in 2001-02.

Nevertheless, long-term investors should note that there are differences between the two slowdowns i.e. the slowdown during 2001-02 and a possible slowdown now. The slowdown in 2001-02 was a technology led slowdown. There was everything extra in the IT industry during that time which ultimately caused the slump. Just to give a few examples, huge spending in dot-coms, e-commerce (Information Technology) and in the telecom verticals. Telecom companies were short of cash during that time, (spending in 3G) which ultimately led to slowdown in the entire telecom vertical. Billing rate from 1999-2000 to 2001-02 grew at a CAGR of 12% and the downturn was an outcome of the crumbling down of all these sub-segments.

Today, the situation is very different. Even if a slowdown happens, it will be mainly due to the current sub-prime crisis and if that expands to the entire financial services vertical, the companies will have to make some adjustment in their discretionary spending. Indian IT companies donít even generate 1% of their revenues from direct subprime vertical. The advantage with Indian IT companies is that though they have been focussed on the low-end job over the years, this may act as a saving grace as IT spending is mandatory in these areas.

As regards Satyam, the companyís deal pipeline is looking good and it is currently negotiating on almost 20 high value deals. The company increase in billing rates is in the rage of 4% to 5%, which we believe is very much sustainable. While winning large deals lends confidence in the growth in volumes, the fact that the company has raised its bar in terms of execution, further corroborates the fact that Satyam is a good long-term investment.

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