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February 20, 2007

Satyam: profits lag as attrition problem continues

Satyam, the fourth largest IT services provider in India, recently announced its quarterly results (covering October-December 2006) and was vilified on the stock market, with its shares falling 8%. Although net profit increased 24.3% compared to the same quarter the previous year, investors were not happy with the results - mainly because the results of its rivals have been better.

By CBR Staff Writer

Satyam has disappointed the stock market by posting lower profit growth than its rivals.

The India top five IT services companies are: Tata Consultancy Services, Infosys, Wipro, Satyam, and HCL. With the exception of Satyam, all of these vendors reported revenue increases of over 40% in the most recent quarter.

The chairman of Satyam, B Ramalinga Raju, explained that, although Satyam’s results were not as high as its rivals, neither is its attrition rate, and this can be expensive, as well as having an impact on customers. In July 2006, Satyam paid its workers an average rise of 18%, which has, in turn, helped it reduce attrition rates to a ‘more manageable’ 17.3%.

Attrition rates vary between different companies, but in general they are in excess of 20%. According to the Indian National Association of Software and Services Companies (NASSCOM) website, by the end of 2007 there will be an anticipated 1.6 million people employed in the IT industry in India (in firms that operate overseas and domestically).

This is indicative of the problems that the Indian IT services companies face, in that demand is so high that at any time a significant proportion of the 1.6 million will go elsewhere for employment if the pay and conditions are an improvement on what they currently have.

NASSCOM has further projections for 2007 that will add to the attrition problems suffered by Satyam and its competitors. NASSCOM’s strategic review for 2007 reported that IT services exports were expected to rise from $13.3 billion in 2006 to $18.1 billion this year.

Taking business process outsourcing, engineering services and R&D, software products, and hardware into consideration, alongside IT services (exports and domestic), overall revenues will rise from $37.4 billion in 2006 to $47.8 billion in 2007.

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Growth at these levels will not only provide these companies with increased revenues and profits, as the markets seem to expect, but also provide more management challenges in controlling the attrition rates. It will remain to be seen if Satyam has done enough to stem the outflow of its staff.

Source: OpinionWire by Butler Group (www.butlergroup.com)

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