Satyam, Analysts Cast Wary Eye at World Economy

By Stan Gibson  |  Posted 2006-09-13

Satyam, Analysts Cast Wary Eye at World Economy

NEW YORK—Just how a global economic slowdown might affect high-flying Indian outsourcer Satyam was top-of-mind at the companys Analyst Day gathering, held here Sept. 12.

Satyam, which posted 35 percent annual growth in its fiscal year ending in March and a 33 percent rise in annual profits, held the conference to celebrate the fifth anniversary of its initial public offering on the New York Stock Exchange.

Wall Street is watching the high-flying Indian IT services companies intently, paying close attention to anything that might cause a stumble. While Satyam, which passed $1 billion in revenue this year, still boasts a robust profit margin, it is down slightly year-to-year. That raises some questions about how an economic slowdown, of which some economists are warning, might affect the company, said Rod Bourgeois, a senior research analyst at Sanford Bernstein in New York.

Satyam joins the club of billion-dollar companies. Click here to read more.

"We have been able to preserve our margins fairly well. There was a small drop in guidance this year," said Ramalinga Raju, Satyams founder and CEO, in an interview. He said the company raised wages between 17 and 18 percent this year and issued restricted stock units to employees, which diluting the companys stock.

Despite these moves, contract prices have remained stagnant for the past few years, he said. In addition, the company has been under pressure from employee turnover, which Raju said had been 19 percent prior to the wage hike, which was granted over the summer.

Ram Mynampati, president of Satyam, said a slowdown wont necessarily hurt the company because customers will look to Indian outsourcers, as they have in the past, to provide savings should IT budgets come under pressure.

Overall, Satyam executives said they expect relatively smooth sailing ahead, as IT budgets remain healthy, growing between 3 and 6 percent annually, and as offshoring assumes its place as a mainstream corporate practice.

The company is reducing its dependence on the U. S. market, now 64 percent of Satyams revenues, as it increases business in Europe, China and Brazil. In keeping with its global push, Satyam has three centers in China now and is setting up a fourth.

Outsourcing to India has delivered rich rewards for a number of companies. Click here to read more.

Raju said his company is moving beyond the days when it made its living from wage arbitrage. The company is now looking to become a global IT heavyweight as it focuses on innovation and leadership.

"Were no longer thinking of catching up, but were investing in leadership. We look at ourselves as a global company," he said. To that end, the company launched its Satyam School of Leadership in Hyderabad, India, in November 2005.

In comments during a panel discussion at the New York Stock Exchange following the Analyst Day proceedings, Bourgeois praised the performance of the companys management. Satyam, like Wipro, Tata Consultancy Services and Infosys, hires thousands of new workers annually, training and integrating them into each companys corporate culture.

Next Page: Indias educational system.

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Raju, like other Indian outsourcing leaders, said the Indian educational system can do better in preparing college graduates for the work force. With 550,000 engineering graduates annually, there is nonetheless a skills shortage among those qualified to work for the outsourcing firms. Thus, Satyam and the other Indian companies must spend months training new hires before they are ready to start work.

"Not all colleges prepare people as well as they should to capitalize on opportunities. Its like access to raw diamonds. There is a need for finishing schools," said Raju. "The amount of effort that we put in will have to come down."

Click here to read more about Indian education.

Also at the Analyst Day event, Satyam managers noted that the company continues to do a robust business in SAP integration. Mynampati cited one large pharmaceutical customer, to which Satyam has assigned 800 employees to handle its SAP implementation.

Mynampati said Satyam remains strong in other sectors, such as manufacturing, where it claims 28 percent of its revenues, as well as among telecommunications companies.

In a sign of increasing deal sizes, he said an increasing number, now 50 percent, are being advised by third-party consultants. This is making the deals more complex and taking them longer to close, he said.

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