Satyam guides 17-19% EPS growth for FY09

Excerpts from CNBC-TV18’s exclusive interview:

Q: How you are reading the US backdrop for 2009 and what has gone in to that 24-26% revenue guidance that you have held out for the market?

Raju: Last two-three months, we have all stayed tuned to the developments that are happening in the US markets and other markets. Our reading of the situation is such that it is well reflected in the guidance that we have given; which is 24-26% growth in the consolidated growth numbers and 17-19% EPS growth is what we have guided. So what we are sharing with the investors today takes into consideration our interactions with our customers and our reading of the market situation. So we are fairly comfortable about the guidance that we have given and we are particularly very happy about how we have performed during the last financial year. It has been quite a phenomenal growth given the number of challenges that we have faced with; given the fact that the dollar has weakened quite significantly, we have been able to deliver well on our guidance and last year we kept increasing our guidance each quarter based on the additional inputs that we have been getting. So we step into the current financial year with certain amount of optimism while taking into consideration, the challenges that we are facing in the market place.  

Q: Our initial check with analysts throws up that they are happy with your revenue guidance of 24%-26%, but they would have liked to see your profit guidance at 20%-21%, which has come in at 17%-19% in 2009, are you expecting any margin pressures because of which your EPS guidance in percentage terms seems a bit more muted then your confident revenue guidance?

Raju: There is no dearth of challenges that we face - the fact that there is an expected slowdown in the US markets; we also have to take into consideration the fact, that the prices - we cannot account for them being significantly higher; we have given a guidance taking into consideration as a stable price environment and under the circumstances, we believe that it is a good position to be i -, we also have to factor in, each year the fact that we have to enhance your wages and in a way find appropriate balance, by way of operational efficiencies, so taking all these things into consideration, I believe that the guidance that we have given under the circumstances is a healthy one and a positive one.

Q: For a couple of other tech companies that we have spoken with, the sense that we got that was the second half of the year would be a bit stronger - is that something that you echo both in terms of pricing and volume growth because this time analysts seem a bit disappointed with a slightly more subdued volume growth as well?

Mynapati: Sitting here, where we are at the current state of the market, i'ts very difficult to predict what would happen in the second half compared to the first half. What we have taken a position on is looking at where the market is today, and what is the most comfortable guidance that we can give; based on the momentum that we have in Q4 and the outlook that we have in Q1, based on the markets that we are very active in, and the markets that are impacted by the current conditions. But I believe that it would probably require a few weeks to months for us to get a complete clarity on where the markets would be for the rest of the year. We will certainly take a position at that time, but at this stage, it would be very difficult for us to say whether the second half of the year would be more positive than the first half, all we can say is to wait and watch at this stage  and see how things would unfold in front of us.

Q: There has been a forex loss as well, what are you working with for the operating metrics by way of what you see for the dollar-rupee, what you are holding in terms of price growth from hereon?

Vadlamani: We have taken a rupee-dollar exchange rate of Rs 40 per dollar. I think that is what has gone into our guidance. So far last three months or so dollar is behaving well and it is kind to us and we have in fact seen a depreciation. When we are taking a call for the next twelve months, the indications are that rupee may remain at Rs 40 or it may appreciate a little bit. So from that point of view, we have factored in Rs 40/dollar guidance and accordingly have arrived at this 26% in topline and 19% upperend of the guidance for the EPS.

Q: What is your operating margin assumption for this year, which has gone into this 17%-19% guidance are you expecting any significant margin pressures or erosion this year?

Vadlamani: We have factored in a 50 bps decline at our operating margin level. This is on the back of whatever Mr Ramalinga Raju have alluded to the wage increments that we need to give effect of July 1, we have factored that in. We are considering the wage hike of around 12%-14% in offshore and 3%-4% for our onset employees that translates to around anywhere between 3%-3.5% on our revenues. So while that is the headwind we have, we have factored in various other operational efficiencies and accordingly said that we will be able to limit the decline to only 50 bps. So that we have factored in our guidance. Accordingly you see that gap between the revenue growth and the EPS growth. In addition to this, we also have factored in a 2% equity dilution because of the RSUs that we have given. So if we factor in these two that differential will be explained.

Q: Mr Ramalinga Raju alluded to pricing and that fact that you are assuming - no uptick in pricing this year. How challenging is the pricing environment right now and are you seeing any attempts to renegotiate prices from large clients or any pressure on prices as such from the BFSI clients?

Mynampati: Obviously pricing environment defers depending on the market segment that you are in; clearly the BFSI segment is more challenging than the others. But on an average, our outlook is that the prices would remain stable at Q4 levels during the FY09. Any positive benefit that we see from pricing would be an added bonus but our assumption is that given the different sectors get impacted differently based on the market conditions we are hoping that our prices would remain stable at Q4 levels.

Q: The point about the BFSI space - what exactly are you seeing over there. Are clients scaling back, projects or demands or is it a pricing side problem or situation right now?

Raju: At this time it is fairly clear that the challenges are more in the consumer facing businesses; they are greater than other sectors and among those, financial services is directly impacted. As far as we are concerned this has not necessarily resulted in; at this time clients pulling back in any significant way other than things that we can expect on ongoing basis. At this time we are assuming that whatever slight lower growth that we may see in sectors like financial services, we should be in a position to makeup for the same in other sectors as such and that’s what has been taken into consideration in giving the guidance.

Q: One word on the two acquisitions that you have announced this morning and what you hope for them to add it to in terms of your topline?

Mynampati: If one looks at the acquisitions, both are very high quality acquisitions - both of them would enable us to operate at a much higher level in the value chain; one is on the supply chain management space, second is on the customer analytical space both of them tend to enable us to operate at a much higher level thereby engage in a strategic dialogue with our clients so we are very excited about that.

As far as addition to the topline is concerned, the guidance factored in about 1-1.3% coming from these two acquisitions for FY09. But we are very delighted about the quality of these two acquisitions.

Q: If I recall correctly, Satyam is to do quite a bit of work for Bear Stearns as well. What’s the situation on that front?

Mynampati: I am not so sure whether we can be client specific in this call. We have our share of financial services customers that are impacted by the current market conditions and they are taking specific measures to manage the situation for themselves and the projections of those challenges have felt by us; it depends on the size of relationship - depends on what the outcome of such steps that the clients are taking that would result in the position as far as our partnerships are concerned.

The situation would not be as clear today; we expect to have that clarity a few weeks from now in specific instance because transactions of that kind require significant analysis of what would the impact on that organization be before we can talk about what service providers like Satyam would be able to do or not do. So we are still waiting for greater clarity to emerge in the financial services market not just limiting to one client. 

Q: What’s the sense that you are getting from your top 10 or 20 clients in the dialogue that you have had with them in the last many weeks, I presume - have many of them decided on a firm budget spending for the next 4 quarters or are budgets frozen or some people are telling you that we will tell you more about it in the next quarter or two which as don’t know yet, what is closest to the truth?

Raju: In most instances, since we are well into the new financial year, because for the US clients, most of the companies follow the calendar, it’s fair to say that the budgets have been more or less frozen. So we are not as much concerned and with that aspect, our concern is more evolving in the situation - we have to closely watch the developments on the economic front and quickly adjust ourselves to the changing circumstances and this is the way in some instances the customers also would look at things. So our worry is not much as to whether they have frozen the budgets or not, our worry would be more about the depth of for the recession. If the depth is very high, then obviously many organizations would be affected and therefore that impact would be felt  by service providers. But if it's somewhat of a shallow recession, then we expect that the positive benefits of companies wanting to bring out operational efficiencies will work to our  benefit. So therefore, it's fair to say that we are observing the situation very closely - the budgets in most cases are frozen, there is a reasonable visibility. So it's not so much question of visibility that we are concerned about whether there will be significant changes arising out of evolving economic situation.

Q: You actually sound more circumspect than most other tech heads that we have been speaking with, how high would you rate the chances that things actually got stickier in the second half of this year, versus recovering significantly?

Raju: Just to be clear, we are very confident about the guidance that we have given, we are confident about this financial year and as we have been stating for the last couple of quarters, because what we were hearing from the market, was not the same as what we were hearing from our customers, and that scenario continues to remain, it is just that we have to take into consideration the realties of the market place - none of us are in a position today to predict as to what would happen to the economic scenario and in a more definitive fashion and my comments were mostly based on the same, and therefore just to reiterate, we are quite confident about the coming year despite so many challenges that we are faced with.

Q: Can you just outline the performance for Nipuna as well this time around and what kind of standalone margin performance that has had?

Vadlamani: Nipuna has shown a QoQ growth of almost 20% and for the entire year whatever guidance we spoke about - 60% YoY growth - Nipuna has achieved it; posted revenue of around USD 61 million and similarly on the EBITDA front also, it turned EBITDA positive. It made a profit of roughly around 5% also at the EBITDA level. So overall, I think BPO basically met with all the targets that it has set for itself and even going forward for FY09 also, we expect Nipuna to perform well on all the parameters - we also expect Nipuna to turn positive at the net profit level next year. So overall I think the BPO story continues to be doing well.

Q : Could you just detail the FY09 margin expectation a little bit more elaborately, what do you expect to see from SG&A, your hedges taken on the foreign exchange to offset that 12%-14% wage hike that you spoke about?

Vadlamani: Last year we have put up a sterling performance on various operational parameters. Our pricing has gone up by around 6% both onshore and onsight - our loading factors have gone up-offshore especially has gone up almost by 10% compared to last year a growth of 10%. Similarly we could successfully move work offshore. We have seen a 3% improvement in the offshore-onsight mix. So on the back of all this, I think next year also we are continuing this good work. For example, even though we are factoring in a stable pricing for the next year; but since we signed off the Q4 with a good pricing hike - the inbuilt pricing hike that we can expect for the next year will be around 2%; so that is definitely going to help us in meeting the margin guidance of 50 bps and as I was mentioning, the headwind because of the wages is roughly around anywhere between 300-350 bps and we need to basically counter that the one through the pricing increase of 2%, which is inbuilt into the model and of course various other operational parameters like SG&A and also we expect the offshore mix to go up - there again we have an inbuilt growth there in terms of the offshore mix going up. So these are various things that went into giving this guidance of around 50 bps decline.

Q:  What is the big deal landscape looking like, are you experiencing any difficulties or sluggishness concluding large deals or they remain on track?

Mynampati: They remain pretty much on track, the pipeline is fairly active and the mix of the pipeline might change somewhat given the current environment. But the pipeline looks very healthy compared to where we were in the previous quarters - we have won our fair share of large deals this quarter as well. In general, given the drive towards greater operation efficiency and leveraging the assets better, many of the customers are looking at partnerships in the context of larger deals. So in my opinion, the current environment would augur well for continued focus on large deals and that is what we are seeing.