Satyam’s low recruitment target spells worries

Satyam’s low recruitment target spells worries
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First Published: Sat, Oct 18 2008. 12 31 AM IST

Updated: Sat, Oct 18 2008. 12 31 AM IST
Satyam Computer Services Ltd reported better than expected results for the September quarter, and even the cut in its guidance estimates wasn’t as high as Infosys Technologies Ltd.
But there are enough worrisome signs in the company’s results that explain why its shares trade at less than eight times estimated earnings for the current year.
To start with, the company has said that it would hire only 8,000-1,000 people on a gross basis this year, against its earlier target of 14,000-15,000 employees.
On a net basis, the addition will be much lower. For instance, the company hired 5,200 employees in the first half of the year, but lost more than half that number through attrition.
The net addition to the employee base was just 2,465. If the same number of employees are added in the second-half period, that would translate into a growth of less than 11% in employee base this year. Since revenues in dollar terms are expected to grow by about 21% this year, that probably points to a lacklustre outlook for the next year.
The low rate of employee addition is only one of analysts’ worries. Some of the beleaguered financial institutions in the US, such as Lehman Brothers Inc. and American International Group Inc., are clients of the company, and although the company claims that it’s business as usual with these clients, the markets aren’t convinced that things will stay that way.
One analyst pointed out that the drop in the number of clients providing more than $1 million (Rs4.87 crore) in annual revenues, from 237 at the end of the June quarter to 230 currently, is also disconcerting.
The consulting and enterprise solutions segment, which contributes to as much as 44.5% of revenues, grew at a slightly lower rate than the company average. This segment has traditionally grown at a faster rate and, considering that SAP AG has recently stated that it expects sales of its enterprise solutions packages to slow, the outlook for Satyam’s largest service offering looks bleak.
In sum, valuations may look cheap based on current year’s earnings, but note that next year’s earnings may well decline if the situation in the US doesn’t improve quickly.
With a bleak outlook on earnings and negative newsflow expected as far as IT spend is concerned, Satyam shares may well continue to be cheap.
Write to us at marktomarket@livemint.com
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First Published: Sat, Oct 18 2008. 12 31 AM IST