Satyam may need to lower employee base to be profitable

Satyam may need to lower employee base to be profitable
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First Published: Mon, Jun 01 2009. 09 55 PM IST
Updated: Mon, Jun 01 2009. 09 55 PM IST
Hyderabad: Although the government has asserted that it would not turn a blind eye to large-scale layoffs in Satyam Computer Services Ltd, analysts said the fraud-hit software exporter has little option but to let go a proportionate number of its staff as it loses clients.
Vineet Nayyar, chief executive of Tech Mahindra Ltd, which recently acquired Satyam, had said last week that the Hyderabad firm had an excess of 10,000 staff on its rolls.
According to data reported for the quarter ended 30 September, the latest available, Satyam had a stand-alone employee strength of 48,434 and a consolidated head count of 52,865, including subsidiaries and joint ventures.
Nayyar, on the other hand, mentioned an employee base of 40,000 after a board meeting in New Delhi.
“There is no doubt about the need for letting people go. If they don’t let excess staff go, then it is very difficult for Satyam to be profitable,” said Pralay Kumar Das, a sector analyst with Brics Securities Ltd. “It is a question of do you want to do it now or later. Given that turning Satyam around is a time consuming process, they might as well do it now.”
Corporate affairs minister Salman Khursheed told PTI news agency on Sunday that the government would “not allow the company (Satyam) to be taken for a ride.”
In response to an email query on the firm’s excess staff, Satyam spokesperson Sridhar Maturi said: “We are addressing issues of resource optimization in a very humane manner. The company is exploring all possible options to optimize its resources. We have initiated a ‘cross-sharing’ of resources with Tech Mahindra, where we will utilize internal resources first before going to the market.”
He added that the firm is “working towards a ‘virtual pool’ concept and is in the process of being finalized”.
With clients exiting Satyam after its founder B. Ramalinga Raju admitted on 7 January to a Rs7,136 crore accounting fraud, an increasing number of employees have no projects to work on.
In his confession letter, Raju had admitted that Satyam had hired more staff than necessary to justify its inflated books.
Before the scam came to light, Satyam had an active client base of 649. In the first week of May, Tech Mahindra’s management, while addressing Satyam employees, said that client attrition was contained at 35%. At that rate,the firm would have lost 227 clients.
Sandeep Shah and Kruap Maniar of ICICI Securities Ltd said in a recent note to clients that Satyam has to lower its employee base to 33,285 to achieve an operating profit margin of 15% on estimated revenue of $1.3 billion (Rs6,110 crore) in 2009-10 after client attrition.
“For a company of Satyam’s profile, profitability margins should be at least in the range of 20%,” said Apurva Shah, head of research at Mumbai-based brokerage Prabhudas Lilladher Pvt. Ltd. “Without addressing the issue of excess employees, it’s tough to even think about profitability.”
“For a software company, the largest chunk of operational expenses is employee cost. Depending on whether the excess staff is located onsite or offshore, the cost burden would can vary significantly as onshore staff cost is typically thrice that of offshore employees,” Shah added.
Das of Brics Securities said staff issues for Satyam have been further complicated by the exits of key personnel, which may mean more client attrition. This, in turn, could translate to some more excess staff, especially if new deals are not won soon.
Shares of Satyam gained 6% on the Bombay Stock Exchange on Monday to close at Rs56.65, on a day the benchmark Sensex index gained 1.4% to close at 14,840.63 points.
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First Published: Mon, Jun 01 2009. 09 55 PM IST