Satyam well placed to deliver FY09 guidance; outlook +ve

Excerpts from CNBC-TV18’s exclusive interview the Satyam Management:

Q: Your initial sense - we haven’t got all the details of your numbers but is there anything in the fine print which could be making the market so nervous? Your stock is down 6.5% after your reported numbers are ahead of expectations and guidance?

Raju: Not unusual; we are sometimes surprised by the market reaction. As far as we are concerned, we had an excellent quarter; we had registered 8.5% growth in rupee terms and the fact that we had 3% growth in volumes clearly indicates the fact that we have had good quarter. I would presume that the markets would come to recognize this better performance.

Q: Perhaps the market is a little disappointed that while you changed your rupee guidance to change the new realities of the rupee-dollar market, you did not touch the dollar guidance for the full year - any reason why you could not up your dollar guidance for the full year at this point?

Raju: The fact remains that we had a 3% growth in volumes, which certainly is lower than what was the case in the last several quarters. But this is as expected and to the extent that we have adjusted for the drop in the rupee and to the extent that we have even in these testing times, have been able to retain the guidance for the year. This is very positive. On the sentiment, it is internally positive based on the fact that we have done a fairly deep analysis and we find that we are well placed to deliver on the guidance that we have given.

Q: What are you factoring in right now by way of margin performance? Do you think it is likely to hold because you have got a wage hike coming as well in the next quarter and what are you working with on the rupee this time?

Vadlamani: Our guidance is at Rs 42.88 to a dollar that is what we have factored into our guidance. Overall, I think on a margin front, in this quarter - Q1, we have put up a very good show on the margin front. This quarter belongs to the margins and because of that, we have said that for the year the margins are going to increase by 50 bps as compared to FY08. So this is as against the 50 bps decline that we have projected three months back in the beginning of this year. So overall I think on the margin front, we have done and also we are going to do very well in this financial year partly aided by rupee depreciation; but also aided by some of the cost optimization initiatives kicking in.

Q: One of the comments you have made in your Press Release is that the situation for the BFSI is fluid. Can you walk us through what’s happened with clients like Citi and Merrill this time and whether or not you are going in for some kind of change in transaction or change in pricing for these clients?

Raju: As the markets are well aware among the various sectors, the challenges are greater in the financial services sector for the reason that the slowdown that we have seen in the US has arisen out of issues around subprime and things of that kind and therefore whatever flat growth that we have seen during the quarter did not come as a surprise and we believe that there are given challenges in the sector but those which we believe we should be able to address and realise by way of stable performance there as well. We have to watch this sector more closely than other sectors but overall we have seen fair amount of stability in the growth across the board. There may have been instances like telecom and entertainment group which has done particularly well, retail and transportation has done well for the quarter while those standout generally the performance across sectors, across technologies has been fairly consistent.          

Q: Raju spoke about the 3% volume growth, we were seeing much better volume growth for the last couple of quarters for Satyam, what could have dented that kind of pace of growth this quarter?

Mynampati: Part of that is perhaps the restlessness of the market, given that some of the sectors like banking and financial services continue to remain a bit more volatile than what we had seen earlier. Also as we have reported, we had an unexpected drop in BPO revenues attributed to one animation client and we have also seen one voice-based BPO client deciding to move away from India and that has resulted in reduction in volume this quarter as well. But we have attributed that to a one-time phenomenon and we do expect this revenue coming back in next quarters.

While enough attention is paid on the financial services market and the challenges thereof, we see a fairly uniformed and consistent demand pattern emerging across many sectors; retail and transportation, we see good activity in insurance, and we see good activity in selected sectors in manufacturing in addition to media and entertainment. So by and large, the markets continue to look attractive for the future but whatever the growth that we have seen in this quarter is attributed to some of the quarterly phenomena such as the animation revenue getting impacted in this quarter.

Q: Are you facing any issues at all with any of your top-10 clients because that is more important because they have a much bigger bearing on your volume growth- any ramp downs or slow downs visible, not just in the BFSI but in any of your other top 10 clients?

Mynampati: No, by and large if you look at the contribution from top clients - top-five clients, top-ten clients; they have remained fairly consistent as a percentage of revenue this quarter compared to the last quarter. Whatever obvious impact that we are seeing in the market is attributed directly to the banking and financial services customers. Otherwise things are pretty much along the predicted lines as related to the guidance that we have given for the year. I would say not really any surprises that we can talk of.

Q: You have held your dollar guidance and last time around the comment from Satyam was that the scope of outperformance is limited, is that at the outlook you would hold for the rest of because for some of your peers, they seem to indicate that growth is going to be blackened- would you hold that call or would you not?

Raju: We have already stated that for Q2, at the dollar level we would have upwards of 4.5% performance and that clearly indicates that other two quarters will be more or less at similar levels therefore we are not guiding for any back ended growth and we are at this time quite comfortable about the guidance that we have given. As you would observe, we constantly adjust for any performance enhancement QoQ as and when they occur and that is the policy we have stuck to in the past several quarters.

Therefore this time, under the circumstances, we believe that the performance we have guided for is what one should depend on and if there are any improvements, we would obviously adjust for the same in the future but we believe that this guidance is a fairly balanced one based on many inputs that we have taken into consideration.  

Q: If you could just talk a little bit more about the problems that you faced on the BPO front this quarter, are they significant setbacks and do you think they will get over in Q2 or can they linger on for most of this year?

Mynampati: The setback is a quarterly phenomenon, it happened unexpectedly in this quarter and it is a fairly transient one. We do expect to recover from the situation in Q2 and beyond. Again there are two issues on the BPO side; the dominant one is the animation revenue, there was a loss in this quarter due to animation business. We expect this business to come back in Q2 and restore to the levels that we expected by Q3.

Second is a marginal reduction in revenue due to a US customer deciding to pull out of India particularly in the voice based BPO. While there is a fact that it is not a material impact on revenue but we do see business coming back from Q2 onwards. So it is a transient one quarter phenomenon.

Q: How are you approaching the rupee now because things have changed between last quieter and this one. Have you changed you quantity of hedges and some of your peers have had to make significant MTM (Mark to Market) announcements. Do you have any such apprehensions for the rest of the year?

Vadlamani: Not really. We have not changed our statistic; we continue to hedge 50% of our expected dollar inflows and today we have a book of USD 675 million. This quarter we have taken a loss of around Rs 36 crore in the P&L (Profit & Loss). So whatever performance we are showing on Earnings Per Share (EPS) front of 17% QoQ (quarter on quarter) growth, it is after absorbing this Rs 36 crore. So I think we have been doing quite well and our hedging policy appears to be holding as well. So from that point of view, we will continue to hedge 50% of expected dollar inflows because nowadays it is anybody’s guess as to where the rupee goes. So in such a situation it is better we are evenly hedged so we will continue with that.  

Q: I know it’s still litigation but can you update us on the situation on Upaid versus Satyam’s case?

Vadlamani: Three months back, we spoke about it and from then to now, it is kind of a status quo; it is subjudice at this point in time and we are confidenct about our case and we are going ahead with our moves. So there is not much an update on that front.

Q: What makes you cautious about the fact that there is back-ended growth a lot of technology companies expecting may not happen. Is it that you think ramp-ups will get delayed even more or do you think there might be significant changes in the kind of deals technology companies have right now with their clients?

Raju: We have guided for next three quarters; fairly even growth in all three quarters. So my understanding is that we are not predicting that the growth would be higher towards the end of the year as compared to the beginning of the next few quarters. I think this is fairly in-line with a consistent growth that we have seen; you would have observed that for the last four-five quarters, we have not only had a good growth but it has been consistent as well and we are not seeing much change in that trend at this time.