We find assumptions that Satyam's business will be re-distributed among the top-3 Indian IT vendors overly simplistic. While some benefits are likely, there are more predators for this ~US$2bn pie than just three. Including IBM, Accenture, Cognizant, and HCLT, we suspect that even a wholesale transfer of business cannot move the needle for a single vendor, exceptions aside. Customers also retain the option to take over operations that Satyam was running for them. Through the last two years, there have been many false dawns for Indian tech stocks, but we think only core demand can drive a secular revival. We stay with zero BUYs in the sector, Infosys as the sole Outperform rating, and believe the others will Under-perform. Over the weekend, the Indian Government announced further steps to stabilize Satyam, including a reset of Satyam's Board and the inclusion of HDFC Chairman Deepak Parekh into the Board. This further indicates the multiplicity of scenarios that could play out ahead and the fallacy of linear benefit extrapolations for any other vendor. Anatomy of disquiet · With insufficient cash to pay even January salaries to its 50,000+ employees, the fate of Satyam's operations will be the top concern for its customers. · On-going vendor consolidations (Telstra, BP being some) as well as changed IT spending priorities at others (Citibank, ML) will further accentuate this disquiet. · Assuming that 60% of Satyam's business is annuity, about 2/3rds of the operations will raise immediate concerns on "business continuity", even though discretionary projects may not drive the same worries, and may be terminated forthwith. Anatomy of safety – Options before a CIO · #1: Take over operations and make them "captive"; but this will involve capacity creation, rapid leasing of space and infrastructure. Customers with already established India captives could explore this option. (e.g. Cisco) · #2: Shift business to blue chip US vendors with meaningful India capacity · #3: Evaluate other offshore vendors · #4: Continue with Satyam (this option ignored for this note's scenarios) · #5: Move select processes in-house and/or onsite (back to the US/Europe) Anatomy of predation – Possible strategies of each vendor · IBM, Accenture: Most likely to highlight their global stature in the industry, 100,000+ India people capacity, and blue-chip status. · TCS: Maximum overlap with Satyam (Citi, ML, GM, GE, Microsoft). Also arguably a more competitive vendor on pricing. · Infosys: Shares accounts such as Telstra, Reuters, Microsoft with Satyam. Likely to highlight its iconic corporate governance status in India and Asia. However, Satyam contracts may not always meet Infosys' pricing criteria. · Wipro: E mail sent to all salespersons asking for aggressive messaging to customers that Wipro is ready to take on operations running at Satyam. · Cognizant: In e mails to employees, management is already highlighting its US listed status, and compliance with Sarbanes Oxley laws. · HCLT: Has sent e mails to over 3,000 customer contacts highlighting its 23 quarter track record of dividends (>$500m paid), as well as its "eZMigrate" framework, where it has transitioned business from other vendors to itself in eight instances. · MindTree: Eyeing select wins (shares Arcelor Mittal customer account with Satyam) Anatomy of extrapolation – We stay focussed on core demand · We expect ~5% benefit for net profits, even if ONLY Indian IT vendors gain in the re-distribution. Assuming IBM, Accenture win some, its only a 1-2% gain. · Indian IT stocks have had phases of out-performance in 2008, driven mainly by currency or market corrections. However, deteriorating core demand has negated these benefits, and all stocks except one (Infosys) ended 2008 as Underperformers. · We continue to base our sector call and ratings on core demand trends, which we still see as worsening, and believe the post-Satyam scandal rally in other tech names (based on predator scenarios) will prove short lived. |
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