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Satyam sees its highest growth rate in $ terms in 5-6 yrs

Published on Tue, Oct 23, 2007 at 10:28 | Source : Moneycontrol.com

Updated at Wed, Oct 24, 2007 at 10:43

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Ramalinga Raju , Founder And Chairman , Satyam

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Satyam Computers announced its Q2 FY08 result. The company in Q2 has reported net profit of Rs 409 crore versus Rs 378.32 crore in the previous quarter. During the corresponding quarters, its net sales were up at Rs 2031.72 crore versus Rs 1830.19 crore on QoQ basis.

Satyam's Founder And Chairman Ramalinga Raju has said that they have enhanced their guidance significantly - 35-36%; almost 42% in dollars terms. The guidance reflects a positive business outlook, he said. The company registered its highest growth rate in dollar terms in 5-6 years, Raju said.

The company's President Ram Mynampati said the company has seen growth sustainability in top clients. He doesn't see any let up in demand from offshore projects. Satyam has registered a fairly broad based growth, he pointed out. The BFSI vertical has grown faster than others, Ram said.

Chief Financial Officer, Srinivas Vadlamani said that the increments and rupee appreciation had impact on margins. The margin has been hit; it's reduced to 267 bps by improved efficiencies, Srinivas said. Satyam 2.8% improvement in pricing is due to improvement in utilisations, he said. The company has factored in rupee at 39.50/$ in the guidance, Srinivas informed.

Excerpts from CNBC-TV18's exclusive interview with the management:

Q: How are you feeling about the business? There have been concerns on IT stocks, rupee, US business outlook. Are you still feeling confident and bullish generally?

Raju: Yes, that has reflected in our guidance for the year. We have enhanced our guidance quite significantly from 35-36% in dollar terms to 42%, that speaks for itself. We are seeing a lot of traction and the business has been quite good. While the markets continue to worry about subprime and various other things, at the customer level and at our business level, we have seen Q2 as one of the best quarter. In fact, in about five-six years this was in terms of dollar growth rate, the highest.

Q: What about the future, this quarter volume growth in dollar terms is really a record for Satyam, but when you poll your top clients what are they telling you? Whether next four-six quarters is what is worrying the market, are you seeing confidence being exuded by your top clients or are they getting a bit nervous about conditions back in the US?

Raju: If they are worried, we don't see that worry being reflected from the manner in which they are wanting to engage with us. We have taken all these things into consideration and enhanced the guidance. Therefore from the top clients and generally clients across the board, we have seen consistent growth opportunities.

Q: Do you think this kind if double-digit growth in dollar terms reported this quarter is sustainable? This is a breakout for Satyam to get into the 11-12% kind of volume growth, what has contributed to it?

Mynampati: We believe that the trajectory growth rate certainly is sustainable. We would not be in a position to come in terms of whether 9% volume growth is sustainable quarter on quarter or not. But purely based on the sentiment in the market, it clearly continues to be a mainstream activity.

While customers are somewhat tentative about what the market slowdown might do to their businesses, there isn't any letup as far as we see and the desire of the customers to engage with a significant offshore project is concerned.

One noticeable aspect of our growth this quarter is a fairly broad base growth, particularly the sectors that you would expect to have some impact due to market slowdown like the BFSI, has actually grown even faster than the rest of the company. We have seen significant growth in the telecom market.

What you see is an accelerated growth in Asia Pacific market and European market that tend to be somewhat resilient to the market challenges in the US. So we have seen a very broad-based growth this quarter and we believe that that trend will continue.

Q: What about margins? Expectedly they have come off in this quarter to 19.8%, but we were hoping that you may still deliver something like 20-20.5% kind of margin levels, what happened in this quarter?

Vadlamani: Yes, the increments had an overwhelming impact of roughly around 450 bps. The rupee appreciated compared to last quarter, 1.3%. That had an impact of around 40 bps and this quarter there is a shift to onsite, our revenues by around 1.5% that had a negative impact of roughly around 17 bps.

Overall we had an impact of around 550 bps on the margins, but that reduced to around 260 bps QoQ because of various other productivity improvements we have brought in. One significant thing is pricing improvement, we have seen weighted average improvement of around 2.8% in prices; offshore prices have gone up to 1.4% and onsite to 2.2%.

We have seen an improvement in the SGNA by around 110 bps. We have industry leading metrics there we continue to do that and today we have in offshore, including trainees around 76% and onsite around 97%. There is an improvement in both the areas and that also positively contributed to the margins.

Net-net, 550 bps headwind, we could reduce it to around 260 bps in this quarter. Going forward, if the rupee behaves as it is as it is depreciating for the last one week and our guidance is at Rs 39.50. While today rupee is at around Rs 39.80 or so. So if the rupee-dollar continues at this rate then we expect our margins to decline on YoY basis by roughly around 175 bps. Last quarter we said that our margins would decline by 125 bps, but that has to go upto 175 bps. This is primarily again because of the rupee because the last quarter we gave a guidance assuming a Rs 40.50 per dollar, now we are giving guidance where we are recalibrating the entire guidance with 39.50. There is almost more than 2% rupee appreciation again, which eats away roughly about 70 bps of our margins.

Overall I think we have learnt to live with the rupee and we are able to manage our margins very well this quarter. On a YoY basis also I am sure that we are doing a good job on the margin management.

Q: So if 1.75% goes from your margin what is the average level of margins projected for this year assuming?

Vadlamani: Average margin will be roughly around 22% for the full year, it was about 23.7% last year.

Q: What more can be done on pricing? It's encouraging to see that prices have moved up on weighted average 2.8%. Do you think that metric can go up a bit to ease some more pressure on the margins?

Raju: We have taken into consideration, enhancement in prices by little bit more than what we guided at the beginning of the year as against 2-3% enhancement in prices. We expect this year price enhancement would be in the order of about 4% or so.

Generally, the customers have so far responded well to some of the appeals that we have made to them in addition to normal contractual renegotiations that happen on an ongoing basis. So we see the trend to be positive. We are also observing a shift in a manner in which customers are engaging with us. We are expecting to see lot of growth among our existing clients base.

Many of the large deals are arising out of our engagements with our existing customers and they are willing to measure us based on the value that they are able to derive as versus the number of people that maybe working to provide given solutions. I think that trend would continue and that would give us greater opportunities to address issues around margins and issues around the impact of dollar weakening.

Q: You get the sense as well, if you talk to your top 2-3 clients in every vertical, are they coming across as a little bit more lenient on the pricing front?

Ram Mynampati:: They are clearly in tune with the realities of the market, cost structures in India going up and Indian companies in general moving up the value chain and delivering higher value services.

So to that extent, they are clearly in tune with having to pay the right price for the right value. That's clearly reflected in our average realised prices going up. In general, it is a supply-demand situation, the greater the demand for high quality services and high quality resources; it would follow the reason that there would be higher prices.

Q: What can you tell us about the big deal and what you have struck in this quarter. I believe there is a big deal with Fujitsu that you have disclosed?

Mynampati: That's correct. In fact if one recalls, Satyam was the first organization to realize the potential for strategic deals and we have a special focus team to pursue strategic deals and the results have been quite spectacular for us. Not only the deals that we have announced already, we have about 20 more deals in the pipeline that we are pursuing across most of the geographies as well as market segments.

In general, the market trend is to entrust partners like Satyam with greater accountability and responsibility to deliver tangible business results and that is resulting in multi million dollar deals and more interesting is that the deal size and the deal flow in the Asia Pacific region is on the rise unlike what we have seen in the past between US and Europe; we are seeing Asia Pacific also catching up.

So we believe that big deals as part of the overall business mix is going to be here for a while and we are as much engaged in pursuing these deals as ever.

Q: Specifically on Fujitsu and anything that you struck on the SAP front?

Mynampati: Fujitsu again, the end customer that we are delivering services is to Reuters which is an existing customer of Satyam. But this effort that we have signed with Fujitsu is part of the overall billon dollar transformation deal that Fujitsu signed with Reuters where in addition to the standard application maintenance and development, we are also going to deliver infrastructure management services and network operation center related services. And we are going to service the global centers of Reuters. But our agreement is with Fujitsu right now, Fujitsu is ultimately the contractor with Reuters and as part of this engagement, not only would we extend our services to Reuters that we already been doing; Reuters has been a customer of Satyam for about seven years now, but it will also give us an entry into whole bunch of services that we probably would not have participated otherwise. So in that sense, it's an important deal.

Q: Would you like to add to that? Are you seeing significant new big deals, which you are winning or are you seeing any kind of restraint in the ramp ups that you have done with new clients over the last few days looking into the next 4-5 quarters?

Raju: This year we have given a guidance of having more than 52,000 people. So in that, sense we have crossed a certain barrier of size. Our interactions with our global clients are pointing towards more and more integrated level solutions being provided.

The confidence level is high. Many times they are finding being an Inc, company Satyam's ability to understand change and deal with it to be higher. So in that sense, the large deals that Ram has talked about is clearly here to stay as a way of engagement - Satyam's persuasive business. The business models also will change towards more and more responsibility being interested to Saytam.

In that sense, in order to sustain growth at a higher base level, this becomes almost inevitable; in that sense, to cross that hurdle is of great importance. We believe that we have dealt with that transition reasonably well so far.

Q: Where is attrition down to now?

Raju: It is on a trailing basis at 13.9% and we have progressively brought it down.

Q: What is your comfort zone?

Raju: Our comfort zone goes without saying that the lower the attrition better. It is anywhere between 10%-12%; it would be a great number to achieve. I think we have done quite well so far.

We expect to attract talent; we are seen as a company that builds leaders and provides right kind of competencies to them and also the fact that there are challenges out there around the dollar behaviour and all that. Hopefully our wage hikes in the future will not be as high as they have been in the past. But we will have to wait and observe.

Q: How are you dealing with the rupee now, have you changed your hedging policy significantly, are you approaching it differently now in the light of what has happened in the last couple of quarters?

Vadlamani: Today we hedge around 75% of our expected dollar inflows over the next twelve months. So to that extent, we have an hedge of around USD 783 million as on September 30. As we speak, it is over USD 900 million while our stated policy continues to be 50%.

But this is a tactical move keeping in view the way rupee is behaving and we have seen an appreciation of almost 11.5% in the last six months. We thought that we would be better off by increasing our hedge. So accordingly, we are taking steps and this quarter particularly, we have benefited a lot. We have a positive impact of around Rs 43 crore gain because of the hedge; that really helped us in our bottomline.

Q: When do you think you will arrive at a situation where the US does not matter so much to your revenues and the dollar becomes less of an event? By when do you think Europe becomes a really large chunk of your overall revenue, where Asia Pacific becomes a material part of your overall revenue point?

Ram Mynampati: I am not so sure whether - our forecast where US would become insignificant. Today if you look at it, there has been a gradual increase as far as contribution from outside of the US is concerned. This quarter you would have noticed that our European contribution is almost 21%, Asia Pac is about 20.6%, so US has fallen below 60% - the broader North American market.

The span of multinationals that perhaps are headquartered in the US is happening in the broader European and the Asia Pacific markets. So in that sense, US continues to be important, you may not be delivering services to US, but you may be delivering services to Europe and the APAC.

But in general, the growth seems to be happening to a greater extent in European and Asia Pacific markets. That's probably reflective of the global macro economic situation that we are dealing with.

What is the equilibrium, what would be the contribution from US? That state of equilibrium is very difficult to predict.

Q: Do you see a situation in the next 6-8 quarters where you can talk about a 40-50% contribution from US dollar revenues?

Ram Mynampati: Again, it's a hypothetical situation. It's difficult to say one way or the other, but it's possible that US can get to 50% of our revenue. Whether it will happen in the next 6-8 quarters is very difficult to predict.

Q: What do you see as the key risks now. As you would have noted, the market has taken a somewhat cautious stance on IT as a sector for the last one year. The rupee is bothering it along with concerns about what will come through US. But all companies are delivering reasonable earnings for the last few quarters. What are your key concerns as the management of Satyam?

Raju: One obvious thing is the manner in which the rupee has been behaving, the trend has been slow and consistent to deal with. It's one thing versus its behaviour being somewhat erratic and that certainly puts a lot of pressure on exporter. We are keeping our fingers crossed and observing the happenings. And while that is the case, we are doing our best to tighten our belt and do the right things such that, irrespective of the behaviour of the rupee or dollar, we are in a position to mange our business in the best possible way, sustain growth and maintain margins. That would be the single most important thing that concerns us at this time.

Apart from that, there are many happenings in the macro-economic level at a global level and those would continue to have an influence on which way the economies behave. What its impact would be on a company like Satyam would continue to be a major item because we are global players now, working in 60 countries or so.

Other than those macro-economic things on which we have little control at the customer level, at the level of building good leadership and delivery competency we have done well and we will continue to pursue that.

Q: If the rupee continues to appreciate over time, as is the general expectation, and in time we go to levels like 34-35 on the rupee, do you think companies like Satyam will still have viable profitable operations and a business model which can support at that level of the rupee-dollar?

Raju: I don't want to comment in specific terms, but it goes without saying that we have to learn to run our businesses well irrespective of what happens at a macro-economic level.

The demand for our services is growing, the appreciation of what we are delivering is high across the globe and we are observing that there is a lot of room for creativity, a lot of room to enhance productivity and continue to show greater value to the customer.

That should translate into definitive solutions that we should be able to provide to the customer irrespective of what happens.