 |
| After much suspense, Shashi & Ravi Ruia
made their plans clear to stay invested in Hutch with a long-term
horizon |
On the
night of February 13, when Arun Sarin, the CEO of UK's Vodafone,
landed in Delhi, the media went berserk. TV journalists turned delirious
cheerleaders, mobbing the 52-year-old head of the world's largest
mobile telecoms company as if it was the homecoming of a crusading
hero. A few days earlier, when Vodafone's $18.8-billion deal to
take over India's fourth-largest mobile telecoms firm, Hutchison
Essar Limited (HEL) or Hutch, was first made public, the decibel-level
in the Indian media had reached ear-splitting levels. Here was a
British company that had just taken over what was, in a manner of
speaking (after all, the 67 per cent of Hutch that Vodafone will
buy belongs to a Hong Kong firm), an Indian telecoms firm and the
Indian media were going ecstatic. Why?
Well, to begin with there is the Indian connection. Sarin, whose
life story is now known to everyone who reads a paper or watches
TV, was born in India and grew up here. So, even though he heads
a British telco, his Indianness fuelled much of the media's breathlessness.
Then, there was the enterprise value of the deal at $18.8 billion,
which translates into Rs 82,870 crore. Vodafone's buy-out of the
67 per cent (52 per cent directly from Hutchison Telecom International
Limited and economic interest underlying another 15 per cent held
by the local partners) was worth $11.1 billion and it's not every
day that India Inc. is rocked by deals of such magnitude. Add
a third dimension to the Vodafone-Hutch story and it makes for
a surefire potboiler: Sarin's Vodafone pipped several big badge-name
bidders to the post, including Anil Ambani's Reliance Communications,
the wealthy Hinduja family and even Hutch's own minority shareholders,
the Ruias of the Essar Group.
Hello, India
Now, after the hoopla is over, let's see what Vodafone's
big-ticket takeover means for everyone in the business. For Vodafone,
whose biggest market is in Europe, the Hutch acquisition is a
gate-pass to the fastest-growing mobile telecoms market in the
world. Vodafone adds over 30 million subscribers annually in its
existing markets; in India, around seven million additional subscribers
sign up for mobile phones every month.
| THE LURE OF
HUTCH |
| THE UPSIDE |
| Vodafone gets access to the fastest growing
mobile phone market in the world that is expected to touch
500 million subscribers by 2010. Cellular penetration
in rural India is below 2 per cent, but 67 per cent of India's
population lives in rural India.
Hutchison-Essar is not just the #4 player, but also one
of the better-run companies with higher average revenue
per subscriber.
3G is set to take off in India, allowing data and video
to ride on cellular networks. Vodafone already offers 3G
elsewhere in the world.
India is key to Vodafone strengthening its presence in
Asia, a region seen as the big telecom story.
THE DOWNSIDE
The cellular telephony market is extremely competitive,
and India has one of the lowest ARPUs in the world. Besides,
ARPU growth is slowing.
It has an uneasy equation with Essar, which is a one-third
partner in Hutch-Essar. That could be a source of problem.
The Vodafone brand is relatively unknown in the Indian
market. Building the brand will cost money and take time.
Telecom valuations are at a high and this could mean it
is years before Vodafone recovers its multi-billion dollar
investment.
Its big competitors are home-grown majors, who can manage
the 'environment' better.
|
That is the essential lure of Hutch. It's not that
Vodafone has not tried to get into the Indian market before. The
company had a joint venture till 2003 with the RPG Group, operating
mobile services in the Madhya Pradesh and Chennai cellular circles.
But it sold out from that venture and it wasn't until the end
of 2005 when it paid $1.5 billion to buy a 10 per cent stake in
India's largest telecoms company, Bharti Airtel through a combination
of direct and indirect holdings.
For Sarin, who has been steering Vodafone through
a stormy patch-last year the telco posted a loss of £21.8
billion on revenues of £29.35 billion-a 10 per cent strategic
stake in an Indian telco, albeit the largest in the country, was
small beer. For Vodafone to get a piece of the high-growth action
here he needed a bigger presence and Hutch is what gives him that.
With 24.4 million subscribers, spread across 16 cellular circles,
Hutch offers Vodafone more than just a toe-hold-it's a base that
it can build on. The company had been on the lookout for that
big-bang acquisition in India and Hutch offered an opportunity
to do just that-an opportunity for which Vodafone was willing
to pay a hefty price.
| What Vodafone
is Up Against |
| A bunch of fierce, home-grown
competitors.
|
| Vodafone enters India at the #4 position,
but it had better not take the slot for granted. It has fierce,
home-grown competitors such as Bharti Airtel, Reliance Communications,
BSNL, Idea, Tata Teleservices, and Spice to contend with.
The question is, how will competition react to Vodafone's
entry? R-Comm, for example, was also in the race for Hutch-Essar
in a bid to become the #1 player.
R-Comm, which offers cellular services both on the CDMA
and GSM platforms, has announced plans of investing Rs 11,000
crore in 2007-08. It has a subscriber base of 28 million,
and has grown the fastest since its services went commercial
in the middle of 2003. At present, R-Comm's CDMA service
in 21 circles accounts for the chunk of its total subscribers
(31.89 million), but Chairman Anil Ambani is keen on building
a pan-India presence as a GSM player.
Sunil Mittal's Bharti Airtel, with more than 33 million
subscribers, is the largest player in the market today and
is the only one that has a pan-India presence. With Vodafone
diluting its investment in Bharti, Mittal with his other
overseas investor, Singtel, is certain to move into top
gear. The agreement between Bharti and Vodafone on infrastructure
sharing and routing of traffic augurs well for Bharti. "The
Vodafone agreement on long-distance services and leased
lines should provide an upside to revenue and EBITDA of
Bharti's long-distance business," says a report from
Macquarie Securities. On the agreement with Vodafone for
roaming (Vodafone will give 50 per cent of its global inbound
roaming traffic to Bharti for three years) Macquarie points
out that there will be an increase in inbound roamers in
the future.
The smaller players such as Idea Cellular and Spice seem
to be getting their act together as well. Idea, for instance,
will be listed on the bourses shortly and, over time, intends
to take the pan-India route. B.K. Modi's Spice, which is
currently a two-circle operation (Karnataka and Punjab),
is looking to go public and could list by May this year.
"A player like Vodafone will take time to understand
the Indian market. Besides, we (read: Indian consumers)
do not really value foreign brands in India," says
Modi. Well, Modi and the others will soon find out if that's
really true.
|
At an enterprise value (EV) of $770 (Rs 33,880)
per subscriber and an EV/EBITDA (earnings before interest, taxes,
depreciation and amortisation) multiple of 16.4 for FY 08, this
deal has certainly not come cheap for Vodafone. In comparison,
Bharti's EV/subscriber is $690. In all likelihood, Vodafone will
have to borrow $3.5 billion (Rs 15,400 crore) to finance the deal.
And although the business opportunity is huge for Vodafone, some
analysts have questioned the valuation. Yet, shortly after the
deal was announced, Vodafone's share price rose by 1.35 per cent
on February 12.
Competition Ahead
 |
| Asim Ghosh is likely to continue
to head the management team in India |
Besides forking out a pile, Vodafone will also
will be up against serious competitors like Bharti, Reliance and
BSNL, all of whom have huge subscriber bases in India and together
account for 58 per cent of the 156 million Indian mobile phone subscribers.
India could also pose other challenges for Vodafone. Indian operators
like Bharti and Hutch earn big profits by squeezing costs although
the average Indian phone call is the cheapest in the world at two
cents per minute (or 88 paise). Analysts wonder whether Vodafone,
whose overheads are huge, can offer low prices and yet make fat
profits. Says Edelweiss Securities' Head of Research, Shriram Iyer:
"Operators can lower their capital costs by sharing infrastructure.
Speaking for India, there will be big subscriber growth over the
next two years and it is important for operators to make entry points
attractive for subscribers." In effect, the trick lies in lowering
tariffs accompanied by a cost-control mechanism.
One way of doing business the Indian way would be for Vodafone
to retain Hutch's Indian management team and indications are that
Hutch's CEO Asim Ghosh will continue to head the business. Ghosh,
incidentally, along with entrepreneur and original co-promoter
Analjit Singh, holds just over 12 per cent in Hutch.
At a news conference in New Delhi on February 14,
Sarin was unfazed by the competition that Vodafone will face in
India, declaring: "We intend to be #1 and we will compete
aggressively with them in the marketplace."
With the deal in the bag, Vodafone will now have
to dilute its stake in Bharti Airtel because India's telecoms
regulations do not allow it to hold shares in two telcos. The
5.6 per cent stake that the UK major holds in Bharti Airtel will
be sold to the Indian promoters over time for $1.6 billion but
because the balance 4.4 per cent is held in a holding company-Bharti
Enterprises-there is no urgency to let go of that for the moment.
In the Indian telecoms market, nothing will change
immediately. The number of operators remains the same; only the
ownership of Hutch changes. The advantage for Vodafone is that
it has bought a very well-run operation with a large presence
in circles like Mumbai, Delhi and Gujarat, which count among the
biggest revenue generating pockets of the Indian market. Says
Manisha Girotra, Managing Director and Chairperson (India), UBS
Securities, which advised Vodafone on the deal: "It (Vodafone)
brings to the table a strong financial backing and also technology
that will help it get across to rural India."
| BPL's Mumbai
Circle |
| "A little wrinkle in the
carpet," says Arun Sarin.
|
| The Ruias of Essar may have decided to stay
invested in Hutchison Essar, but they still have one issue
to sort out with Hutchison Whampoa's Li Ka-shing: BPL Mobile.
When the Ruias acquired BPL Communications from Rajeev Chandrasekhar
in 2005, it brought along four cellular circles-Mumbai, Maharashtra,
Tamil Nadu and Kerala. All the circles were merged with Hutchison
Essar, except Mumbai. Why? Since Hutch-Essar was not able
to get the go-ahead from the Government, Essar took Hutch-Essar
to court. As things stand, the fight over the Mumbai circle
has been referred to an arbitrator. Vodafone's Arun Sarin
isn't losing sleep over it. When asked how he viewed the fight
over the Mumbai circle, he said that, "I hope they are
able to resolve it. Till then, it will be a little wrinkle
in the carpet." The worrying part for the Ruias is
that the Mumbai circle is among the most lucrative in the
country and uncertainty over its future will mean opportunity
lost. Within Mumbai, BPL Mobile has a subscriber base of
1.06 million. But competition is intensifying. Already,
BPL Mobile's growth is beginning to slow. Besides, the Aditya
Birla Group-owned Idea Cellular is expected to launch its
operations in Mumbai by the end of this year. Even smaller
players such as Spice Telecom of B.K. Modi are looking to
expand their operations and Mumbai is said to be on their
radar. "The business needs to be looked at closely.
BPL Mobile's valuation will only suffer if something is
not done at the earliest," says a Mumbai-based investment
banker.
Now that Hutchison Whampoa is exiting telecom in India,
there may be chances of an out-of-court settlement with
the Ruias. And if the arbitration goes Essar's way, then
the Ruias may want to sell BPL Mobile to their new-found
partner, Vodafone. |
Hutch's healthy finances are another big gain for
Vodafone. In 2006, Hutch earned a profit of more than Rs 1,000
crore on revenues of Rs 5,724 crore, making for an EBITDA margin
of 32.7 per cent. Contrast that with Vodafone's revenues for 2006
at £29.35 billion and a loss of £21.8 billion.
 |
| BPL Mobile: Legal wrangle
may hurt its valuation |
Besides operating in the low-cost Indian market,
Vodafone faces other imponderables. Like the Essar Group that owns
33 per cent of Hutch and was one of the rival bidders for Hutchison
Telecom's stake that finally went to Vodafone. "It is our sincere
hope that Essar will stay. But if they want to exit, we have told
them that we will be willing to pay them what we paid Hutch. One
does not want them to leave but at the end of the day, the choice
is theirs," says Sarin. The Ruias of Essar, who have big plans
for their other businesses like steel and refining, could do a lot
with the more than $6 billion (Rs 26,400 crore) that could come
their way should they decide to exit. But in a recent briefing to
media, Ravi Ruia, Vice Chairman of the Essar Group, has said that
his group does not intend to exit. "We are clear that Essar
is a long-term player in the telecom industry and we have no plans
to exit this company or business." Worryingly for Vodafone,
it has been reported that Essar could take the legal recourse-because
they felt they should have been consulted before Vodafone announced
an infrastructure sharing and roaming agreement with Bharti Airtel.
Then, of course, there is the small matter
of the Hutch brand and its iconic dog, a lovable pug, which it
uses in its ad campaign. Many believe that eventually Vodafone
would like to replace the Hutch brand with its own eponymous brand
like it has done in countries like Czechoslovakia, Turkey and
Romania, where it entered by taking over local companies. Says
brand consultant Harish Bijoor: "Unlike fast-moving consumer
goods, the process of changing a brand name in telecom is far
easier since the involvement of the consumer with the service
is much greater."
Having paid a bomb for Hutch, Vodafone would also
be keen to see how soon it can recover its investments in India.
Indians typically spend little on phones, with around 70 per cent
of Indian mobile phone users preferring to opt for pre-paid services
that are offered for small-ticket monthly outlays. The average
revenue per user (ARPU) in India is just less than $100 a year-it
is around $8 per month compared to around $10 per month in China,
$59 in Switzerland and $63 in Japan. That could mean a long wait
for Vodafone to recover the money it has spent on acquiring Hutch.
But most Indian operators make up for low spends by playing the
volume game, signing on huge numbers of new consumers every month.
And, of course, by keeping costs down to a bare minimum.
Can Vodafone do that? "We are here for the
very long term. The country has just 13 per cent mobile penetration,
which will go up to 50, 60 or 70 per cent in the years to come,"
says Sarin.
CORPORATE
Satyam's Moment of Truth
It's still India's #4 IT company, but the
gap between Satyam and the other Tier-I players such as TCS, Infosys
and Wipro is growing. Why has Satyam lost pace and what is its
founder-Chairman Ramalinga Raju doing to accelerate growth?
Venkatesha Babu
 |
| Speed needed: Satyam campus
in Hyderabad |
On January
19 this year, Hyderabad-based Satyam Computer Services announced
its third quarter numbers. By most measures, the results were impressive.
Its revenues had grown 31 per cent to Rs 1,661.1 crore compared
to the same quarter in the previous year, and its net profit had
jumped 25 per cent to Rs 337.2 crore. Yet, Dalal Street reacted
by hammering the Satyam stock by 6 per cent on that day, wiping
out nearly $500 million (Rs 2,250 crore) in market capitalisation.
What went wrong? While announcing the results,
Satyam's founder-Chairman, Ramalinga Raju, said that the company
was revising-downwards-its growth guidance for 2006-07: Instead
of the initial projection of Rs 6,476 crore in revenues for the
full year, Satyam would now be doing anything between Rs 6,434
crore and Rs 6,442 crore. Hardly a significant drop, but what
miffed investors possibly is the fact that Satyam couldn't meet
a target set by itself. They didn't care if the rupee was hardening
(which was the actual reason for the minor revision).
| Satyam vs Critics:
The chinks in Satyam's armour and what it's doing to fix them. |
| What Critics Say |
| Net margins of Satyam are low compared to
those of Tier-I peers. 20.3 per cent for Satyam versus, say,
27.5 per cent for Infosys* Onsite-to-offshore ratio is
skewed towards onsite, leading to lower margins
It's a late entrant to the BPO/ITeS segment
It's more of a price warrior in the market place
At $50-$55, Satyam's onsite man-hour billing rates are
lower than Tier-I players' ($60-65)
Not perceived as a good paymaster in the industry, leading
to higher attrition rates
Management talent is not deep enough
It has had too many spin-offs, joint ventures and subsidiaries
Satyam doesn't have significant presence in fast-growing
verticals such as IMS & testing
Overly dependent on a few segments like manufacturing
and package implementation
*Comparsion for the third quarter ending December 31,
2006
What Satyam Says
Margins have improved in the recent past and in the third
quarter of current fiscal, they actually rose nearly 2 percentage
points
Over the last three years, Satyam has improved the ratio
and will continue to do so
BPO arm Nipuna set to grow 80 per cent this year
We do value-added services, including consulting
The new contracts and the existing ones being renewed
are being billed at higher price
Compensation benefits and attrition rates are in line
with industry standards; rated as a best employer
Have made several lateral hires at senior positions
Have integrated most of them into the parent (like Renaissance)
or sold them (like Sify)
Couple of quarters not a trend. Have made investments.
Bullish about growth prospects
Those are areas of strength, but have entered (over the
last three years) new areas such as Healthcare & Pharma,
Retail, Transportation & Logistics, which now fetch
15-20 per cent of revenues
|
That investors consider Satyam-the word means truth
in Sanskrit-a relatively less dependable performer among the Tier-I
it companies is evident from the lower price-to-earning multiple
its stock commands. Compared to a multiple of 30.99 for Infosys
and 33.19 for Wipro, Satyam gets just 26.8. Indeed, a Business
Today analysis of industry numbers for the last five years reveals
that Satyam has been the slowest-growing company in Tier-I. While
Infosys has grown at a compounded annual growth rate (CAGR) of
38 per cent, TCS at 34 per cent and Wipro at 32 per cent, Satyam
has managed just 28 per cent. Similarly, its bottom line has expanded
at 19 per cent, compared to 32 per cent of Infosys (see Tier-I
Laggard). If Satyam doesn't accelerate its pace, it runs the risk
of losing its #4 position to Cognizant Technology Solutions by
2008, even if the latter merely maintains its topline five-year
CAGR of 58 per cent.
| "We Will
Acquire, Not Be Acquired" |
| After delivering an upbeat message about industry
prospects at Nasscom's recently concluded India Leadership
Forum, Bhimavaram Ramalinga Raju Byrraju, 52, Founder-Chairman,
Satyam Computers, sat down for a free-wheeling chat with BT's
Venkatesha Babu in Mumbai. Excerpts: Even, say, five years
ago, Infosys was just a third bigger than Satyam Computer.
But today, Infosys is more than double Satyam's size. Has
Satyam lost its way a bit compared to the industry troika
(TCS, Wipro & Infosys)?
No, I don't agree. Satyam has grown well in the recent
past. We are the youngest of the Tier-I companies and we
have done well to become the fourth-largest player in the
market. But would we have liked to grow faster? Obviously,
yes. I think we are well poised to accelerate our growth
even further.
Despite being the fourth-largest player, Satyam seems
unable to differentiate itself. For example, if Infosys
is well known for its strength in the BFSI space, Wipro
is known for outsourced R&D and telecom, while TCS is
seen as a provider of end-to-end solutions. Where does Satyam
position itself?
We have several unique strengths, not just as a services
but as a solutions provider. Our strengths in the automotive
sector are well known. We are the leading player in the
enterprise applications (read: package implementation) space.
We are extremely bullish about IMS (infrastrcture management
services) and extended engineering services. We have had
significant momentum in sectors like retail, healthcare
and pharma, transportation and logistics. Our consulting
practice is growing nicely. I think our customers understand
the value we bring to the table.
You were the only Tier-I company that revised its revenue
guidance (in rupees) for 2006-07 downwards. Markets responded
by hammering your stock 6 per cent down in a single day,
that too in a raging bull market.
Look at our third quarter numbers. We have had 31 per
cent growth (compared to the same quarter of the previous
year). Our margins (EBITDA) went up by more than 200 basis
points. By all measures, we are doing well. The small revision
in our guidance is due to rupee's appreciation. We think
we have guided the investors well about current and future
prospects of the company.
What are you doing to change the perception of Satyam
as a price warrior? Your onsite-offshore mix is skewed towards
onsite, leading to lower margins.
I completely disagree. (Slightly raises his voice), Satyam
has not been a price warrior. I don't know whose perception
you are talking about...
...Borne out by your margins and...
...We continue to grow our revenues and margins well.
Our onsite-to-offshore mix is as per industry standards.
We remain a preferred choice as employer as borne out by
many surveys. (Editor's note: Satyam is one of BT-Mercer's
Best Companies to work for in India.)
You were late in recognising the potential of the BPO
sector. Will Satyam catch up this year?
This year, (Satyam's BPO arm) Nipuna will grow upwards
of 80 per cent. So, we are already seeing significant growth.
But if opportunities present (for acquisition) and if the
fit is right, we will examine it. We are not ruling out
anything.
Why are there persistent rumours about Satyam being a
possible acquisition target for IBM?
I think we have clarified this enough number of times.
(Sighs wearily) Let me repeat this: At no point of time
have we had any talks with IBM or any other system integrator.
I think certain vested interests might have (floated this
rumour) for their own benefit. If at all we move (in that
direction), we will acquire, not be acquired. Our goal is
clear. To make Satyam the world's leading IT services and
solutions provider.
|
Losing Pace
 |
"All contracts, new as well as renewals,
are being struck at rates comparable to those of other players
in the industry"
Ram Mynampati/President (Commercial & Healthcare
business) |
As recently
as five years ago, Infosys was just a third bigger than Satyam.
Today, or rather by March 31, 2007, it will be double Satyam's size.
Neither Raju nor his top executives admit that there have been missteps,
but the numbers speak for themselves. Why did Satyam slip where
the other three Tier-I players continued to soar? One part of it
has to do with Satyam's own DNA. TCS, India's oldest it services
company, was launched and run by professionals, as was Infosys.
Wipro is the only other large player that was family-owned and managed,
except that Azim Premji managed to attract some top-notch professionals
from the industry.
Satyam, in contrast, was
even more family-managed. Raju, his younger brother Rama Raju
(who is the CEO) and cousin Srini Raju (he was the coo between
1992 and 2000) were the people who shaped the Satyam culture in
its initial years. While the Rajus weren't techies (unlike the
founders of Infosys), they were savvy entrepreneurs-the family
had been in the textiles and construction businesses earlier-and
imparted a risk-taking and entrepreneurial culture to the company.
While that's good for any company to have, it led to Satyam chasing
opportunities in a variety of areas. Satyam Renaissance was launched
in 1995 to do consulting, followed by Vision Compass (a product
development company), Satyam Ventures (an engineering services
company), and Satyam Infoway (an internet company), among others.
Most of these ventures have since been integrated with the parent
company or sold off (like Satyam Infoway, now called Sify), but
while they lasted, they took precious management time and energy
away from Satyam Computer.
Therefore, while the it outsourcing market changed
rapidly, and Indian vendors moved away from body-shopping to more
value-added work, Satyam was relatively slow in making the transition.
Even when Satyam won contracts going head to head with Indian
or foreign competitors, it quoted lower rates to win. Says a senior
manager with a competitor: "Infosys walked away from its
GE relationship when the margins offered were unattractive, but
even today, GE, which is known for squeezing its vendors, is the
single-largest customer for Satyam. This speaks volumes about
what Satyam is ready to accept."
| Satyam: Will
it Buy or Be Bought? |
| Industry experts say the former is
more likely. |
| For the past one year, the IT industry has
been agog with rumours of Satyam Computers being in play.
While a friendly or hostile takeover can never be ruled out
(after all, EDS did buy Mphasis), it's unlikely that Satyam
would be acquired by a foreign major such as IBM (which has
been the rumoured suitor)-and not just because Ramalinga Raju
says so (see "We Will Acquire, Not Be Acquired").
For starters, its market cap of Rs 33,000 crore ($7.5 billion)
means that there are few players who would have the ability
to pull off such a large acquisition. Also, Raju's family
owns only 8.3 per cent of Satyam. That means most of the shares
will have to be mopped up from the open market at higher prices.
Says a Senior Vice President at a competitor company: "IBM
already has 53,000 employees in India. What do they get for
$8 billion? Thirty-five thousand employees that they can hire
on their own, given their superior brand equity. The other
part is customers," says the executive, adding that "except
for Satyam's package implementation, automotive and extended
engineering services, other parts of the company are not that
attractive. But Satyam is unlikely to break itself up into
parts." On the other hand, there are others who think
Satyam is the most likely of all Tier-I players to go in
for a big bang acquisition internationally to leapfrog or
at least draw level with the top players. Says Alok Shende,
Director (ICT Practice), Frost & Sullivan: "I think
Satyam needs to be seen more as a predator rather than an
acquisition target, as it seeks to scale up." Going
by this and Raju's own statement, the Satyam sale story
should perhaps be put on hold. |
Ram Mynampati, President, (Commercial and Healthcare
business), Satyam, bristles at the allegation. "Maybe this
was true three or four years ago, but not now. All contracts,
new as well as renewals, are being struck at rates comparable
to those of other players in the industry." According to
analysts, marginal differences still exist. Satyam's onsite billing
is said to be in the $50-55 range, compared to $60 or more of
most other Tier-I players. That's a double-whammy of sorts, since
onsite engineers cost more too. And in Satyam's case, even today
a little more than half of its revenues come from onsite billings.
In a December 2006 report on pricing, CLSA India analysts, Bhavatosh
Vajpayee and Aniruddha Dange, say that "Satyam's early ERP
clients came in at rates that arguably did not include a premium
for the skill-set (rates were similar to those of application
development and maintenance), but established credibility over
the last two-three years could help Satyam reap the benefits now."
In the same report, the analysts point out that Satyam has a 10-13
per cent discount to Infosys on both offshore and onsite rates.
From Volume to Value
 |
"For the first time, we are getting invited
to the global high table. We should get bigger deals"
Hetzel W. Folden, Senior VP (Strategic Deals Group) |
Mynampati points out that the skew towards onsite
revenues is due to Satyam's strength in package implementation,
which is primarily an onsite activity. As for improving billing
rates, he says that there has been a conscious movement away from
volume to value. There's something else that Satyam needs to fix.
Traditionally, it has been heavily dependent on a few lines of business
and even a few customers. Manufacturing and enterprise application
have been its forte, and nearly a third of its revenues comes from
its top 10 customers. "The problem with this approach is that
it is focussed heavily on only one area and is light on several
other verticals where its larger rivals have built a leadership
presence," says Sanjeev Hota, it analyst, Emkay Share &
Stock Brokers. He further points out that Satyam gets around 40-42
per cent of its topline from package implementation and maintenance
services from customers such as sap, Oracle, and Microsoft. "This
is one of the highest (figures) in the industry," says Hota.
"In the case of TCS, Wipro and Infosy, the figure is between
15 and 25 per cent." (see Satyam vs Critics.)
Stepping On It
 |
"We did not go out and hire rainmakers
to kick-start consulting. We have tried to be focussed on
customer needs"
Shailesh Shah, Director & VP (Corporate Strategy) |
Satyam has
also been seen as missing out on larger deals (upwards of $100 million).
So, a little over a year ago, it brought on board Hetzel W. Folden
as Senior Vice President (Strategic Deals Group). A veteran of CSC,
Folden was given a clear mandate-bag deals that fetch $100 million
in billings a year. That hasn't happened yet, but Folden says that
nine deals in the $50-million category have been bagged in the last
five quarters. "For the first time, we are getting invited
to the global high table. With customers unbundling multi-billion
dollar deals into several smaller pieces meant for different vendors,
we should get bigger deals," says Folden.
Once again, Satyam has been late to offer BPO work
as part of its IT outsourcing capabilities. Ergo, Nipuna, its
two-year-old BPO arm, will contribute just $36 million (Rs 158.4
crore) to Satyam's topline of $1.43 billion (Rs 6,292 crore).
"This year (2006-07), we will grow north of 80 per cent,
though, admittedly, on a small base," says Venkatesh Roddam,
Head, Nipuna. "Also, we have changed the mix of voice-to-non-voice
ratio, which is critical in the long run." But turning Nipuna
into a growth engine for Satyam could take a long while. Simultaneously,
Satyam is focussing on more value-added consulting work. In October
2005, it acquired Knowledge Dynamics, a Singapore-based business
intelligence firm, for $3.3 million, and in May 2005, it purchased
Citisoft, a London-based consulting company, for £20.5 million.
"Unlike others, we did not go out and just hire rainmakers
to kick-start consulting," says Shailesh Shah, Director &
VP (Corporate Strategy), who is spearheading the consulting initiative.
"Rather, we have tried to understand, advise, anticipate,
and deliver customer needs." According to him, consulting
(including that within verticals) fetches 14 per cent of Satyam's
revenue.
The good thing for Satyam is that it is not too
late yet. It is still the #4 player and has acknowledged strengths
in areas such as package implementation, which, technology research
firm AMR says, could be a $40-billion (Rs 1,76,000-crore) global
business over the next 3-4 years. So, if it can convert its strengths
into a market dominating leadership position with the ability
to price by results (read: value) and not efforts (man-hour),
it can move into a higher growth trajectory. The opportunity exists.
Raju and his team need to cash in on it.
-additional reporting by Rahul
Sachitanand
|
