The Hindu Business Line : Good show, but sub-prime woes cast shadow

A tight rein on key operating metrics, changing geographic-mix with reduced US dependence and change in service mix tending to higher-value services have helped Satyam Computer Services deliver a good set of numbers for FY08. But select clients who have had sub-prime related write-downs, lower contribution from the manufacturing and BFSI verticals and limited head room available on tweaking some key metrics may be causes for concern.

US dependence is less

This fiscal, the contribution from American clientele (60.2 per cent) fell 4.3 percentage points compared to last year. The ‘rest of the world’ (19.2 per cent), driven by Asia-Pacific, the MEA region and Europe (20.6) made good this shortfall. The growth in Asian geography is desirable , as this region has seen strong trends in IT adoption and spending.

The consulting and enterprise business (usually billed at higher rates) now vies with application development and maintenance, a volume-driven service, as the top contributor to overall revenues. This trend, if sustained, may enable better margins for Satyam.

The offshore component of revenues has increased by over 3 percentage points to 51.8 per cent, for the year; this is favourable for margins as it entails lower costs. This trend needs to be seen in light of other Tier I companies such as Infosys also looking at enhancing their offshore component. Utilisation, at 83 per cent for the year, is the highest among Tier I players. Such levels suggest a more volume-driven growth. The ‘TIMES’ (i telecom, semiconductor and media sectors) and ‘retail transportation and logistics’ verticals have contributed more to revenues. The growth in the former is especially desirable as telecom and media sectors have become more software-driven. Attrition has been brought down to 13 per cent from 15.7 per cent over the year.

Concerns and outlook

But there are points of concern. BFSI (26.9 per cent) and Manufacturing (24 per cent) verticals have both declined in terms of overall contribution to revenues. . There is no clarity yet on the implications of Bear Stearns’ sale for Satyam. The management has indicated that it may be a few months before the extent of sub-prime problems and their impact on IT budgets become clear.

Fixed-price contracts have declined a steep 7 percentage points. Utilisation at 83 per cent levels means that headroom for increasing it further may be limited. Wage inflation at 11-14 per cent offshore and 3-4 per cent onsite as well as increase in tax incidence from the present 12-13 per cent may create pressure on earnings.

Satyam has given guidance at the upper end for a 25.9-per cent growth in revenues and a 19-per cent growth in EPS. No price increase has been factored into the guidance.