The other software company: Raju's Satyam deserves better treatment

As this magazine goes to press, Satyam Computer Services, the Hyderabad-headquartered company that ended 2005-06 with Rs 4,792.59 crore ($1.065 billion) in revenues and Rs 981.93 crore in profit, is trading at Rs 762.50 on the Bombay Stock Exchange. It sports a price-earnings (P-E) multiple of 25. That last should be among the lowest for an IT firm, especially one with over $1 billion in revenues. Industry bellwether Infosys boasts a P-E of 35.7. And HCL Technologies, smaller than Satyam in terms of revenues (although it is a $1-billion-in-revenues company on the basis of its current run rate), boasts a higher P-E of 36.2.

Byrraju Ramalinga Raju, now 50, Founder and Chairman of Satyam, believes that there isn't much to be read in the P-E multiples of the companies, which aren't all that far apart anyway. "One must recognise the fact that Satyam is a relatively younger and smaller company," he says. "After 2000, the growth rate came down as the focus was on more balanced growth (reducing dependence on key customers and locations).''

That may be the case. Or it could just be that investors do not see anything distinctive when they look at Satyam. "I think in the next 12-18 months, it's important for Satyam to articulate clearly its strategy in handling competition, establish differentiation and demonstrate the steps it is taking to win, and more importantly, manage large deals," says Sudin Apte, Country Head & Sr Analyst, Forrester Research India.

Still another reason for the market's relatively low valuation of Satyam could be the company's dependence on its large customers. In 2005-06, the top five customers accounted for 24.94 per cent of its revenues and the top 10, 37.25 per cent. The corresponding figures for TCS were 17 per cent and 27.5 per cent, respectively.

Satyam's response to all this (and also to the perception that it doesn't have a strong senior management team) has been to, "operate with a mindset of leadership and innovation at a global scale", according to Raju. "The core issue is to build leadership across the spectrum," adds T. Hari, Director and Sr Vice President (HR). "We have invested in a leadership school and hope to have 80 per cent of our leadership needs met internally." The company has reinforced this initiative with selective lateral hires: over the past eight months, it has recruited around 25 execs with between 15 years and 20 years of experience from firms such as Accenture and eds.

If there is one thing that can turn things around for Satyam (from a valuation perspective), and earn it the respect it deserves, it has to be its war chest of close to a $1 billion. That, and an articulated appetite for inorganic growth.