IT Services Sector
Implications for the sector post the Satyam fiasco
Implications for the IT services sector post the bombshell from Satyam
Will anyone come closer to buying Satyam? Chances of Satyam surviving the mess subside
Satyam's loss, others chance upon 'market share' gain opportunity as clients show 'flight to safety'
Satyam's recent disclosures of 3% operating margins in Sept'08 results- increased scrutiny for Indian offshore companies
Implications for offshore IT pricing
In the aftermath of further damaging revelations from Satyam on 7th January'09 we ponder over several issues like (1) whether Satyam could still be a takeover target for anyone or can it survive the current mess that it finds itself in on it's own, (2) more scrutiny for Indian IT services companies, (3) Could Satyam's 3% operating margins have negative ramifications for the offshore IT services pricing/model and (4) market share gains for other vendors with all possible help rendered by Mr. B Ramalinga Raju.
Can Satyam survive the mess on it's own?
We believe that Satyam would find it very difficult to survive through the current mess as it would not only face the challenge of trying to retain clients but also the risk of employees fleeing the company (who would be equally disturbed with the recent set of affairs at Satyam in our view). Until yesterday's disclosure, we had believe that Satyam faced the possibility of a minor or near term business disruption after the aborted Maytas Infra and Maytas Properties acquisition and would be able to tide over the issue.
However post yesterday's disclosure we believe that Satyam's possibility of riding through the mess are now very slim as even key employees would be flustered after the event. We point that going by Satyam's monthly salary bill for Q2FY09 at ~Rs 5.2 bn with Satyam's depleted cash balance at ~Rs 3 bn now and the operations not generating enough cash it would be difficult for the company to sustain operations. Further we believe that Satyam's pursuit of both new business as well as keeping existing business could run into rough weather as it faces legal enquiries and litigation from several quarters.
Reduced possibility of any suitor steeping in now
We had been arguing over the past few days that Satyam's 'Low Market Cap, High cash Balance' combined with its strong offshore capabilities and notable client roster would be a strong appeal for either strategic/financial investors. However with the recent disclosures from Mr. B Ramalinga Raju the possibility of any acquirer emerging for Satyam would have reduced considerably as Satyam now faces prospects of losing business, clients and even employees alike. Further any suitor would need to account for any potential liabilities that might still not be disclosed as of now. We would be put a low probability to such a possibility emerging.
Increased Scrutiny for Indian IT Services players
We believe that Indian IT services industry will face greater scrutiny by both clients as well as investors as the Satyam saga now for sure causes some form of collateral damage to the sector. We highlight that Mr. B Ramalinga Raju's letter yesterday stated that the operating margins in the standalone business were a mere 3% which compare with margins of ~20% or higher for almost all offshore Tier 1 names. So could that have negative implications for the other peers as well? We do not think so as we believe that it only indicates to risks that could play out if business contractual terms are not managed properly. Further we believe that the actual operating margins for Satyam could actually be significantly higher than the 'restated' margins (as indicated by Mr Raju's letter) which could contain one time write offs related to some large contracts (which should ideally have been disclosed separately)
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