'Satyam's PI biz to grow by 60%'

Pricing leadership not seen: Goldman Sachs

Goldman Sachs Global Investment Research has termed Satyam Computer Services' package implementation pricing strategy 'surprising'.

Satyam which earned close to Rs 687 crore in the last fiscal representing a significant 26.22 per cent of its total business from the packaged software business, charges billing rates which are only 10-15 per cent higher than the average billing rates of the company.

The Goldman Sachs research report expects Satyam's package implementation (PI) business, which is the second biggest contributor to overall business, to grow an estimated 60 per cent in the current fiscal.

But surprisingly, the research team felt that Satyam despite the dominant position it enjoyed in the PI business was not demonstrating pricing leadership.

"Satyam indicated that its lower rates are by choice and the result of client penetration and relationship management considerations.

We note that Satyam's peers are able to get higher billing rates and manage higher profitability from this line of business; therefore, in our opinion, Satyam needs to demonstrate pricing and margins leadership in the coming quarters if it hopes to hold on to its leadership position in the space," the Goldman Sachs report said.

The pricing strategy apart, the research team has predicted the PI business of Satyam to grow an whopping 60 per cent which would mean that by the end of this fiscal the company would earn revenues of around Rs 1,000 crore plus from its PI business.

Satyam's growth strategy for its PI consists of creating industry-specific templates and frameworks, which it intends to use to bid for fixed-price work; and in the area of data warehousing and business intelligence, Satyam is investing in tools and intellectual property, which it hopes will help differentiate its offerings, the report noted.

The report said that through this Satyam believed that it would enable it to lower its total cost of ownership (TCO) of a solution for the client and protect its own profit model.

Satyam has also apparently accelerated its H1B visa applications programme because of the cap of 65,000 that was introduced by the Bush administration last year.

According to the report Satyam's monthly applications for H1-B are in the region of 10,000- 12,000 a month.

"By this count, the annual visa cap of 65,000 for the federal fiscal year 2005 (October 2004-September 2005) may get exhausted by October 2004. Satyam is accelerating its visa application plans, so as to have enough numbers in the inventory (1,500 at present). Although the numbers may appear adequate, Satyam's main challenge lies in matching skill sets, especially in light of the fact that growth for Satyam is driven by PI business, where appropriate skill sets are in short supply," the report noted.

Subsidiaries in the red

Satyam Computer Services' three subsidiaries Nipuna Services Ltd, Satyam Manufacturing Technologies Inc. and Satyam Computer Services (Shanghai) have all reported losses.

Satyam has in its annual report indicated that it would be investing close to $10 million going forward in Nipuna, its BPO subsidiary. The company has already invested a similar amount in the BPO subsidiary. Nipuna has reported revenues of Rs 11.25 crore and a loss of Rs 21.01 crore.

The other two subsidiaries closed their financial years on December 31, 2003. Satyam Manufacturing Technologies Inc has reported a net revenue of $1,126,973 and a net loss of $14,858 while Satyam Computer Services (Shanghai) has reported a revenue of $634,593 and a net loss of $182,515.