Satyam has made a positive move with the recently announced partnership. Satyam tied up with CSC and according to the terms of the agreement, Satyam will provide software-consulting, design & development services in the areas of ERP, e-Business and legacy system implementation and maintenance for CSC's global customers. The agreement is for a period of three years.
The software services majors in the west have been facing stiff competition from the Indian companies. While the Indians have been offering same quality of services if not better, they have been able to price them at almost half of what their western counterparts like CSC, EDS and IBM charge. This is due to the fact that employee costs for the Indian companies is lower by one fourth.
Countering the pricing pressure, especially in the present economic environment seems to be the motivating factor behind CSC’s current move. Thus, this move will give it access to low cost services through the offshore model, which has been pioneered by Satyam. CSC can now offer services to its clients at a lower price.
Annual sales per employee
Satyam will set up dedicated offshore development centers (ODCs) to provide services to CSC's global customers. Satyam expects that over 250 of its employees will work on these assignments in the coming years. Considering the earnings average earnings per employee for 1HFY02, according to our estimates, 250 employees could mean revenues of Rs 537 m (US$ 11 m) over period of one year. Though is very small compared to Satyam’s estimated revenues for FY02 Rs 16,354 m (US$ 340 m). But real advantage is that Satyam will gain access to CSC’s global clients. CSC is the one of the leading global players in the IT services segment with revenues of Rs 480 bn (US$ 10 bn) in FY01. Satyam could reap significant benefits from this move in the future years.
This could very well be the inflection point in Satyam’s efforts to grow. Satyam at the current price of Rs 215 is trading at a P/E multiple of 16x its FY02 estimated earnings. The company’s stock trades at a discount to its peers due to concerns regarding the company’s management and numerous subsidiaries. The question now is: Is this the first of many to come for the Indian software sector?
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