Satyam’s Growth Prospects Look Solid

Among the outsourcers, Satyam (Nasdaq: SAY) today stands out as a safe global bet because it continues to consistently perform on its goals. Satyam provides information technology services and business process outsourcing (BPO) services in the U.S., Europe, the Middle East, and Asia-Pacific. The company’s approach and “Satyam Way” is in 4 key points of strategy:

* Increase the proportion of offshore services, to increase the profitability of contracts.

* Reduce staff attrition to hold onto key staff experience, today a very big problem in India.

* Increase new client revenue and maintain relationships with existing customers, so that there is adequate predictability in the ongoing revenues, as well as human resource planning and allocation, a tough job at this level of scale.

* Increase value to customers via integrated business solutions across functional areas and improved support for relationships.

How has this strategy worked for the company? Extremely well. In fact, it would be interesting for the smaller Indian outsourcers to learn from Satyam (and Infosys, which we covered yesterday), how to modulate the business as they scale.

First, the company was able to offset rupee appreciation and its impact on margins by adjusting its offshore mix (49% off vs. 51% on in March 2007). While currency rate dilution was not Satyam’s strategy at the time, the company did successfully leverage its offshore mix to more favorable terms for operations, helping negate a $25 million Q1 currency loss.

Second, the company maintains a high staff utilization and retention. The company has brought attrition rate down from 19% to 15%, no small feat in these market conditions. [I am very curious about the mechanics, but haven’t ad the time to research that yet.]

Third, Satyam continued to bring in new customers and retain existing business. CEO Ramalinga Raju recently confirmed Satyam was working towards 8 new engineering deals worth $20-25 million. Satyam also added 29 new customers in Q1 with the $5 million-plus customers increasing to 65 clients total.

Satyam’s push for revenue growth in Q1 (June 30, 2007) recorded sequential revenue growth of 10%. The consulting and enterprise business solutions grew by 15% in Q1, and extended engineering solutions grew by 14%. The infrastructure management services produced an expansion of 36.4%, and the company’s BPO services grew by 15%. Q1 total revenue totaled $452.3 million and net income for Q1 was $93.1 million, and a sequential growth of 8% after factoring in stock compensation charge of the $5.9 million. This was a huge improvement versus previous annual revenue of $1.4 billion, thus projecting 2008 to reach $1.7 billion.

Client demand was in Enterprise Solution Business which represented almost 45% of Q1 revenue, and the incremental revenues represent 50% of the total incremental revenue growth.

Due to the above growth, annual revenue growth guidance going forward is predicted to be between 34-35.5% in 2008 and earnings growth between 28-29%.

Regarding the fourth key point, building value for customers, Satyam’s continues to market infrastructure services across all verticals, being a common fabric of every market segment. This is done in two ways: acquisitions to fill gaps in services customers want, and by deepening relationships via expansion of local presence. Presumably, these relationships and the knowledge of the infrastructure layer of clients’ would lead to increased vertical applications integration and implementation business on an ongoing basis.

Growth through acquisition was first initiated with Knowledge Dynamics in Singapore and Citisoft in England. Since then Satyam’s acquisition strategy focuses on access to specific technologies and exploit synergies, with the goal of expanding service delivery centers globally to increase market entry leverage. This in turn folds into increasing customer value through localized relationships. This strategy seems to be the common denominator across all major outsourcers today.

In terms of expansion, Europe has been growing, particularly in financial services, manufacturing, and telecom. Satyam‘s European activities focus on enhancing relationships with a given region, and investing in local staff and competencies in language and culture etc. This produced a 26% year over year growth in March 2007. However, 2008 revenues are still expected to come primarily from the U.S.

Priced at $26/share Satyam is a cheap buy for a quality company given the above analysis. If it continues to deliver on its strategy, Satyam should rise much higher than the current $31/share target for the year. It is easier for Satyam to deliver on its growth promises than it is for Infosys simply because Satyam’s base is smaller, and Infosys is already operating from a much higher basis.