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Taking the international route for growth... - Views on News from Equitymaster
 
 
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  • Nov 5, 1999

    Taking the international route for growth...

    19th October 1999. The place - NASDAQ. The occasion - a new IPO. The stock debuts at US$ 35 per ADS (American Depository Share), an amazing 94 percent premium to the issue price. It goes on to touch an intra day high of US$ 47 before settling down at US$ 35.5 per ADS. Hold your breath - even more incredible than the stock rise is the fact that the IPO was one of an Indian company - Satyam Infoway. At the end of the ride, a fund manager answered the million dollar question that having a 'good parent' had added to the attractiveness of the issue.

    The parent in question is none other than Satyam Computers (financial year 1999 Revenues Rs 3.8 bn) - one of India's largest software exporters with an employee base of over 4,350. It is one of few Indian companies that have developed expertise in a wide range of information technology (IT) related services. Starting from humble roots, the company has grown into a complete solutions information technology company capable of providing its customers integrated solutions. This has given it a competitive advantage over several of its competitors. Today, the company offers services related to Enterprise Resource Planning (ERP) system implementation, management consulting, IT consulting and CAD/CAM software (50:50 JV with General Electric). It is one of two companies globally to have achieved the SEI-CMM Level 5- enterprise-wide certification.

    In the past, Satyam's reliance on Y2K related work was higher, with a focus on top line growth. However, the approach of the Y2K deadline and the desire to move up the value chain, has led the management to take concrete measures to improve the quality of its earnings. The company has reduced exposure to Y2K related activities to just 5% of revenues in the last quarter (financial year 1999 - 28% of revenues) and has stepped up its focus on the high growth area of Internet and e-commerce projects. The company has also developed considerable domain knowledge in banking and finance, insurance, healthcare, telecom and manufacturing.

    Revenue break up  
    Legacy and Y2K related 25
    ERP 8
    Engg. services and embedded software 8
    Ecommerce and internet applications 15
    Open systems and related technologies 43
    Total 100

    Satyam has developed strong product development capabilities. Its products include, Dr Millennium - a Y2K related product, Searchpad - an enabler for web knowledge sharing and VisionCompass - a business performance measurement and management software. These products have enhanced Satyam's image as a world class information technology company.

    Given its strong software development skills, not surprisingly, Satyam boasts a strong client base of over 125 corporates (25 of which were added during the last quarter). State Farm Insurance, Ford Motors and General Electric and 18 other Fortune 500 companies are clients of the company indicating the high level of international confidence it enjoys. In order to improve the quality of its services and relations with its customers, Satyam has set up off site/local development centres in USA.

    Satyam has got a significant presence in the fledgling Indian Internet access and services sector through its 59% stake in Satyam Infoway. The subsidiary company is the second largest in the sector, next only to the government-owned Videsh Sanchar Nigam Limited. It provides customer internet access services and corporate network and technology services and also has an online portal and several content sites for which it has tied up with America Online, Compuserve, Sterling Commerce and Open market. Satyam's decision to set up a separate company for this business was probably motivated by the large amount of capital expenditure that would be involved and the need to source technology from international companies (in exchange for an equity stake).

    Satyam currently derives over 76% of its revenues from the US alone. In the wake of an economic slowdown in the US it may find itself faced with a grim scenario. Another concern is that the company derives over 43% of its revenues from its top five clients (FY99). This again implies that the company could face a serious revenue gap if relations were to sour with any one of its large clients. These concerns could be addressed if it were to expand its customer base and at the same time hedge its country risk.

      2QFY00 2QFY99 % change
    Software exports 1,546.2 918.0 68.4
    Domestic sales 24.2 0.5 5,025.0
    Other income 4.9 0.4 1,151.3
    Financial expenses 101.8 70.8 43.6
    Depreciation 191.2 92.2 107.5
    Tax 15.0 11.0 36.4
    Net Profit 307.4 184.2 66.9

    In the meantime, Satyam continues to go from strength to strength. It posted a 64 percent jump in profits for the second quarter ended 30th September 1999. Even as it focuses on providing more value added services and new products, the company is fast emerging as one of India's leading IT companies.

     

     

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