Hyderabad: A month before Mahindra Satyam restates the accounts of Satyam Computer Services Ltd, analysts invited to interact with its clients have come away optimistic about the business prospects of the software services firm.
Tech Mahindra Ltd acquired Satyam in an auction arranged by a government-nominated board in April last year. Satyam fell into a crisis after the company’s founder and chairman B. Ramalinga Raju confessed in January 2009 to misstating the company’s accounts to the tune of Rs7,136 crore over several years.
Satyam, since rebranded as Mahindra Satyam, has turned cash-positive, and its financials have improved along with client and employee retention ability, industry analysts said after the interaction on 27 May. Clients present at the event included a large Internet search engine firm, a European bank and an American rail transport company.
Graphic: Bharath Sai/Mint
The report card represents a significant upward revision from the analyst perspective of the firm, although chief executive C.P. Gurnani said in April that it would require another two years to completely stabilize its operational metrics.
At the interaction with clients and analysts, Satyam’s management said the restatement of its financials “should be done by July”, according to Mike Atwood, an expert in information technology outsourcing at Horses for Sources, a US-based analyst advisory firm. “They are trying hard to clear the air and start on new footing firmly based in facts.”
He said “the sales glitz that Satyam was famous for was gone” at the interaction. “All the presentations displayed a more down-to-earth, fact-based approach, which is perhaps an indication the engineers are now in charge.”
Analysts said Satyam had turned cash-positive on a stand-alone basis since it was acquired by Tech Mahindra, not taking into account the restatement due by June-end and litigation.
“While we cannot say what effect the restatement will have, Satyam is generating enough cash on the operational front to spend on marketing and sales,” said Chandranshu Singh of Ovum, the information, communications and technology consulting arm of the Datamonitor Group.
The firm also indicated that operating margins are in the lower double digits, compared with Indian peers where margins are between 20% and 30%.
“Clients have been more loyal that expected, especially in Europe. Big names were lost in the US, but some may eventually come back to Satyam again,” said Rachael Stormonth, analyst at Nelson Hall, a business process outsourcing (BPO) research firm.
Large clients such as General Electric Co., Cisco Systems Inc., Nestle SA, Qantas Airways Ltd, Ford Motor Co. and Microsoft Corp. have chosen to stay with Satyam.
“Whatever clients were lost were not because Satyam couldn’t deliver, but because of policy constraints from the client’s side about dealing with a troubled firm,” said Balachandran Ganesh of Ovum. “Talking to the clients convinced us there were never any delivery issues with Satyam...”
The firm had 380 clients at the time of the acquisition in April 2009, according to a previously released figure. Additionally, 54 new clients have been won since, some of them being Flextronics International Ltd, Commerzbank AG and Old Mutual Plc.
While these are mid-size deals, Singh of Ovum said that big-sized deals don’t typically come in one stroke. They become large as existing contracts are expanded to include more services. From this point of view, Satyam’s new wins are significant.
“Satyam will adopt a more aggressive marketing push after restatement. The company was bound by disclosure caveats, which will not hold after June. This will help expand client base,” said Diptarup Chakraborti, principal analyst at Gartner Inc.
He cautioned that in the last two years, Tata Consultancy Services Ltd, Infosys Technologies Ltd, Wipro Ltd and HCL Technologies Ltd had moved into a bigger league, competing with foreign multinationals such as International Business Machines Corp., Hewlett-Packard Co. and Accenture Ltd.
“Satyam’s DNA has never been that strong and it will have to play catch-up like other Indian firms,” Chakraborti said.
While employee attrition at Satyam is higher than the industry average of 12-13%, it was limited by the global recession last year and the economic slowdown at home. A company spokesperson said in April that the firm had 28,000 employees, compared with 41,622 at the end of March 2009.
Over the last quarter, the firm recruited both freshers from premier Indian business schools and laterally. Satyam is also rehiring lost talent and offering a 30% pay hike at the entry level.
“Challenges do lie in rebuilding some local management presence, for example, in continental Europe. However, the enthusiasm in many people I met about their solution or service line was very evident,” said Stormonth.
While the integration with Tech Mahindra may be an issue, it is mitigated on many counts. Satyam’s push into the infrastructure, telecom, aerospace and defence verticals leverages upon Tech Mahindra’s areas of strength.
“Several companies are going after the infrastructure support market. They tend to require upfront investment and the returns are in the latter years,” said Warren Gallant, founder and president of Sourcing Board, an outsourcing industry consultant.
“Traditional software companies have had a hard time looking at this business as their stock requires a large return each year. Companies such as Tech Mahindra which have diversified businesses understand and can support the development of those businesses,” he said.