Satyam, India's fourth largest software exporter is one software company that has been much in news recently on account of several outsourcing contracts won by it. In its way of shrugging off slowdown blues, the company has been moving up the software value chain, thus increasing its share of revenues from high-end services. In this write-up, we would discuss briefly about the company, its past performance and its prospects going forward.
As for its business, Satyam's major part of revenues comes from software design, development and maintenance services. However, over the past couple of years, the company has managed to move up the software value chain, and this can be seen by the growth in its package implementation service, the contribution of which has increased from 6% of revenues in FY01 to 21% in FY03. This rise in revenues from this high-end service is likely to benefit the company in the long-term as the market for the package implementation service is large (as per NASSCOM-Mckinsey report, by 2008, India's export potential for package implementation stands at US$ 4.9 bn from the current US$ 0.5 bn), thus promising tremendous potential for the company to grow its revenues from this segment.
In recent times, the pressures faced by the company on account of the slowdown in global technology spending has been more or less similar as its domestic peer Infosys. As both these companies have faced pressure on the pricing front, the initiative has been to grow on the volumes front. However, Satyam has lagged Infosys on this (volumes growth) front as seen in the graph above. But now, the situation seems to be improving for Satyam as can be seen by a number of outsourcing contracts (Fujitsu, World Bank, Bangkok Airport) coming its way. Despite the fact that these contracts have not been too large in size, they definitely are likely to act as harbinger for larger size contracts to flow the company's way. And Satyam, in anticipation of a greater demand in the future, is consistently scaling up its operations by way of increased initiatives on the human resource and selling and marketing fronts. As a matter of fact, Satyam has already added around 1,500 employees during 1HFY04 to take its total employee base to 11,250 employees.
At the current price of Rs 334, the stock is trading at a P/E of 19.8x our FY04 earnings estimates. While this valuation looks lower when compared to other domestic software majors, investors need to give careful consideration to some of concerns surrounding the company. While one has been Satyam's inability to grow on the volumes front, the other major concern relates to the investment decisions (like Sify and Indiaworld) that the company's management has taken in the past. However, while these failed investments do not arouse confidence in the company's management's ability to handle future investments, the company's recent initiatives of restructuring its service portfolio and moving up the software value chain is likely to help Satyam in growing on the volumes front.
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