Software, Hard Cash
Satyam Computer has appreciated four times in the last six months. A look at the companys performance and its future.
Software stocks have been big gainers on the bourses in the last few months as the industry is doing well. One such scrip, which saw its stock price jump about four times to Rs 160 is the Hyderabad-based Satyam Computer Services. From a turnover and net profit of just Rs 4.6 crore and Rs 1.6 crore respectively in 1993, the company has grown quickly to enter the list of the top five software companies in the industry.
For March 1997, turnover and net profit stood at Rs 89.7 crore and Rs 20.4 crore. After achieving such phenomenal growth in the past, one wonders whether the best is over for Satyam Computer?
Today, Satyam Computer offers a wide range of services in information technology. Its focus and strength lies in process excellence consulting, system integration services, application development and management, Euro and year 2000 solutions, electronic commerce (e-commerce) and electronic data interchange (EDI) related services.
For a long time, Satyam Computer was mainly perceived as a Y2K company with turnover in excess of 50 per cent coming from this division. (Y2K or the year 2000 problem is one in which computers will stop functioning in the year 2000. A lot of code needs to be re-written to tackle this problem.)
But now the company has diversified into other infotech areas like e-commerce, internet etc. Today, only 30 per cent of its turnover comes from Y2K projects, with over 20 major customers spread in Canada, USA, Europe, Saudi Arabia and Japan.
However, the Y2K business will disappear within two-three years. This does appear to be a large exposure for Satyam. But Aditya Srinath, an analyst with the stockbroker SSKI, says, For a company like Satyam Computer a Y2K project proves to be fruitful in the long run as it provides an entry into a large company.
Satyam Computer has done extremely well in the Y2K segment. Its offshore solution for the Y2K problem (SOS 2000) is the first methodology from an Indian company to have received the prestigious ITAA*2000 certification from the Information Technology Association of America. Fewer than 10 companies world-wide have received this certification.
According to Ajay Sharma analyst with stockbroker IIT InvesTrust, the turning point for the company was when its state-of-the-art software development facilities in Hyderabad became operational. This was also the time when the Indian software industry was just beginning to look up.
With good services behind it, Satyam Computer grabbed the opportunity to emerge as a leading player in software. Currently, it has development centres in Hyderabad, Secunderabad, Bangalore, Chennai, Pune and Bhubaneshwar. It is also planning a development centre in Delhi. The Satyam Technology Centre (STC), near Hyderabad is a sprawling software park set on 114 acres of land and provides an excellent environment for software professionals.
Manpower is the key to success in any software company and Satyam Computer realises this very well. Today, it has over 2000 professionals. It has in-house training facilities, similar to a mini university to train its employees and keep them in line with technological developments.
The other critical success factor for a software company is to retain clients. Today more than 60 per cent of its clients come back to Satyam Computer for their requirements. The company has long term contracts with Fortune 500 firms like Caterpillar, Volkswagen and Selective Insurance.
It is also the preferred software vendor for over 50 multinational and Fortune 500 clients including -- General Electric, AT&T, Ford, Bankers Trust, Northwest Airlines, Sony, Rockwell, Bank of Montreal and Mitsubishi Electric. Of its clients, 60 per cent are multinationals and 80 per cent are based in USA.
It has a joint venture with Dun & Bradstreet (D&B) called Dun & Bradstreet Satyam Software Services. This joint venture was set up to provide software services to D&B clients world-wide. Satyam has a 24 per cent stake in the joint venture. Today, this company is the largest software centre outside USA, servicing all D&B units worldwide.
Last year, Satyam Computer signed a three-year contract with General Electric for its outsourcing requirements. This contract came to its way when Infosys and GE agreed to discontinue their prior arrangement. This was a major turning point for its perception was concerned. More then 200 professionals are expected to work on this project. It is also working on the University of Utahs distance education project, which paves the way for its entry into multimedia computing.
Satyam Computer also has four subsidiaries, all in information technology (see box). Does this lead to any conflict of interest? No, says Srinath. These subsidiaries act as small business groups with focus on independent product and services, adds he. Any decision to hive these subsidiaries could affect Satyam Computers valuation.
One major apprehension about the company is the groups foray into power generation, which is a capital-intensive industry. This may lead to funds moving out of Satyam Computer, fear analysts. In the past, Satyam Computer, with a stronger balance sheet, has funded group companies.
Software exports from India have been growing at a compounded annual rate of 59 per cent in the last five years. To counter competition from countries like Israel, Brazil, Mexico, and Philippines, Indian software companies have been moving up the value chain.
Satyam Computer too has taken this approach. And hence, Satyam Computer has moved from contract services to complete application development. The package SOS 2000, a complete end-to-end solution for year 2000 has been successfully marketed around the world to over 20 customers. The company is also planning to launch a product for Internet users in the coming month.
The final conversion of its fully convertible debentures will increase the equity shares by 10 million in the market. Will this affect the sentiment? The price might react in the short run but there is an appetite for the stock, says an analyst. The optimism is brought out from the fact that the company is expected to grow by over 30 per cent well above the overall industrial growth in the next two years. Further, weakening of the rupee will act in its favour of the company as its earnings are dollar driven.
The first quarter has been fantastic and the income has increased by over 40 per cent over the corresponding previous period. It clocked a turnover of Rs 29.5 crore and profit of Rs 6 crore. For 1997-98, it is expected to achieve a turnover of Rs 130 crore and a net profit of Rs 30 crore giving a EPS of Rs 8.5 and P/E of 18.8. Considering its strong fundamentals and excellent growth prospects, the story is not yet over for Satyam Computer. It is attractive around Rs 140.
Chips of the old block
Satyam Spark Solutions: The company focuses on software products. It is working towards developing a series of products for the international market. Products under development include a neural network based product for Internet application, an executive information and data warehousing product and other communication-related products.
Satyam Infoway: This company operates in the area of electronic commerce and electronic data interchange. It is also establishing a state-of-the-art, nation-wide frame relay data and voice network for enabling electronic commerce and electronic messaging. In the first phase, the company plans to implement its network in seven cities by September-end. This will be expanded to 15 cities by the next year. It has a tie-up with Sterling Commerce, USA for e-commerce and more such tie-ups are in the pipeline.
Satyam Renaissance Consulting: It is in the business of providing consultancy to clients to increase their competitiveness. It also provides knowledge-intensive business solutions with appropriate technology. Besides business process engineering, it also undertakes consulting assignments for achieving strategic and operational excellence. The company also engages in strategic planning for information systems and business automation for its customers.
Satyam Enterprise Solutions: Its main focus is in end-to-end infotech solutions, systems integration, implementation and support services to telecommunications, financial services and manufacturing areas. It has entered into an agreement with Oracle Software India for providing services especially to the financial and telecommunication sectors. It has a tie-up with DAN-Net for clearing and roaming services in telecom.
The first quarter has been fantastic as the income increased by 40 per cent over the corresponding previous period. Satyam recorded a turnover of Rs 29.5 crore and profit of Rs 6 crore.