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India outsourcer Satyam still recovering after turmoil

John Ribeiro | Aug. 4, 2009
Analysts say some of the company's top clients have canceled contracts or are exploring other options

BANGALORE BUREAU, 4 AUGUST 2009 - The problems of Indian outsourcer Satyam Computer Services are not yet over despite new management, according to analysts.

Customers are still very cautious despite the fact that another outsourcer, Tech Mahindra, holds a dominant stake in the company, said Sudin Apte, a senior analyst at Forrester Research, on Tuesday.

Tech Mahindra has not helped matters by not outlining how it will integrate the two companies and how long it will take, Apte said. Forrester estimates that the integration will take at least 12 to 15 months.

A Satyam spokesman said on Tuesday that the company's turnaround is not complete, but said the company has made considerable progress.

Satyam has not lost customers since Tech Mahindra was selected to acquire a stake in the company in April, he said. Customers are lifting their embargoes on new business with the company, and new customers are signing up, he added.

The spokesman, however, declined to forecast when Satyam would start posting growth rates in line with the rest of India's outsourcing industry.

The brokerage and investment firm CLSA Asia-Pacific Markets is taking a dimmer view of Satyam's prospects. In a report issued late last month, the firm said assumptions that revenues at Satyam will stabilize and growth will return to industry averages are "overly simplistic."

Satyam plunged into a financial crisis in January after its founder, B. Ramalinga Raju, said that the company's revenue and profits had been inflated for several years. Satyam lost customers in large numbers, with most of its customers in the insurance sector terminating agreements, Apte said.

A board nominated by the Indian government ordered the accounts of the company to be restated, a process that is still continuing. The board also recommended that a strategic investor should be inducted into the company by an auction. Tech Mahindra was selected in April through its subsidiary Venturbay Consultants.

After Tech Mahindra came on board, customers stopped terminating their relationships with Satyam, Apte said. But between 60 to 70 customers that have master service agreements with the outsourcer have not assigned new projects, as they are waiting and watching, he added.

Satyam will have to focus on more business from existing clients before trying to get new clients, according to Apte.

New customers know very little about the winning bidder, Tech Mahindra, he said. The company, which has the U.K. operator BT as a key investor and client, is primarily focused on the European telecommunications market, Apte said.

Tech Mahindra does not also bring any significant synergies to Satyam's outsourcing business, which is focused on a number of industry verticals, he added.

Satyam may also be overstaffed to the extent of 15,000 to 17,000 staff, as its revenue is likely to have fallen by half in the past five months, according to Forrester. Removing many of those staffers from its payroll could have political ramifications and be opposed by the Indian government, it added.

 

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