11-Sep-2007
Dear All,
My view on the IT sector and its prospects .. Gist of what i replied in MMB..
Sure the Short-term outlook is still unclear and it will probably remain that way till the results, but long term looks very very attractive. If i look at the reasons for the fall or underperformance it could be basically because of 2 reasons, Re Appreciation and US Slowdown. I do agree that these are real concerns but if we look back Re appreciation is not something new and i have mentioned this here before too. The main reason for the last qtr was the sharp appreciation which is un-expected and such a sharp appreciation has happened only twice before.
Regarding US Slow down which is not sure yet is also not something to worry really. If i look at the numbers of IT Majors during the last time when US had a recession makes me wonder if one should really worry about it. I feel if US does slow down, it will present lot more opportunities with probably some pressure on pricing (but not on volume) which is not seen yet. This was confirmed most of the IT major recently including satyam yesterday. I believe LTI should hold onto it and great companies at bad times are always a buy. Also infy hasnt made any significant inroads with the consulting businees and my belief is that its just a question of time, though it has taken much longer than they would have liked.
Ofcourse history may not repeat itself and “This time it will be different” and price is the only thing thats correct in the markets..
Cheers
On 9/13/07, + feltra wrote: > > Dear all, > > Here’s the 2nd part of the article. > > Best Regards, > -feltra > > *OUTLOOK ARENA** >> VIEWS ON NEWS >> SEPTEMBER 12, 2007* > > An overview of IT Consulting (Part II) > SOFTWARE SECTOR QUOTES | > MYSTOCKS | FREE > NEWSLETTER > > In our last article, we focused on Infosys Consulting. > In this article, we shall delve upon Satyam’s consulting division. The > global market size of IT consulting is around US$ 50 bn. IT consulting as a > separate business is relatively new to Indian IT companies. So one could > find that most of the Tier I IT companies have a very limited history in > this arena. This is perhaps one of the major lacunae in the business models > of Indian IT companies. At this juncture, they not only need to compete with > global MNC’s to ensure that they also get a big share in the large IT > outsourcing deals happening around the world but also focus extensively on > consulting aspect to replicate the models of global MNC’s. This, we believe > is necessary since the nature of business of Indian IT companies is such > that global players could find it relatively easy to replicate business > model of Indian IT companies and Indian companies could face challenges in > replicating business models of global MNC’s. However, we will now focus on > Satyam Consulting division (Citisoft Plc). > > In line with its Indian peers, Satyam was also focused on the application > development and maintenance (ADM) services till FY05. Its major shift came > in FY06 when it acquired Citisoft Plc in May 2005 to focus on business and > systems consulting in UK and USA. Satyam acquired 75% of the shareholding in > Citisoft for an initial cash consideration of Rs. 622.5 m. Prior to > acquiring Citisoft, Satyam started providing consulting services in FY04 but > revenues from consulting was very little (less than 0.5%) and was clubbed > with Enterprise Business Solution revenues. > > In the first year of acquisition in FY06, Citisoft recorded revenues of > US$ 13.2 m and net loss of US$ 0.4 m. In FY07, Satyam made an additional > investment of Rs 275 m to acquire the remaining 25% stake in Citisoft. In > FY07, Citisoft recorded revenues of US$ 11 m (decline of 17% YoY) and net > loss of US$ 0.3 m. > > *What’s in store?* > Satyam is one company, which has managed to move up the value chain very > fast. This is evident from the growing contribution of high-end services to > the total revenues, which now almost stands at 50:50 ratio. The company has > bagged many large deals over the last 12 months. As regards volume growth > and growth in billing rates, Satyam could easily outperform its peers as it > has always worked at a good discount of 15% to 17% in billing rates to its > peer Infosys. So in a way, Satyam is better placed to hike its rates. As > regards the consulting segment of Satyam, it is still in a growing stage and > it could easily take another 4 to 5 years for the company to bring its > consulting revenues in line with that of Infosys Consulting revenues of > 3.6%. Currently, the consulting revenue stands little over 1% of Satyam’s > consolidated revenues. Another key challenge for Satyam Consulting will be > to find and retain quality experience professionals over a longer period of > time and create an intellectual property to grow and compete faster. > > > > *Investment > > (US$ m)* *Employees* *Clients * *Revenues > > (Rs. m)* *Net Loss > > (Rs. m)* FY05 10.0 68 25 211.1 330.3 FY06 7.0 176 54 1,430.0 360.0 > > FY07 3.0 209 89 2,130.0 1,110.0 > > Source: Annual reports > > > > The business gathered momentum in FY06 and the company had 54 clients in > > FY06. It generated revenues of Rs 1.43 bn, a net loss of Rs 360 m and > > had 176 employees on its roll. The company also invested additional US$ 7 m > > in FY06 and with the initial investment of US$ 10 m the total investment in > > Infosys Consulting Inc. stood at US$ 17m. The company moved a step > > forward in FY07 and completed its planned investment of US$ 20 m. In this > > fiscal, Infosys Consulting recorded revenues of Rs 2.13 bn, net loss of > > 1.11 bn and had 209 employees on its roll. The client base of Infosys > > Consulting stood at 89 in FY07. > > > > *What the future holds? * > > We believe that the consulting division will be a major source of > > revenues for Infosys going forward. The company has completed its investment > > in the consulting division and the recent rumours of Infosys acquiring > > Cap Gemini also stems from the fact that at that time Infosys was indeed > > looking was an acquisition in the consulting space to move up the value > > chain. Infosys has the highest billing rates in consulting among its > > Indian counterparts and is able to garner business from some of the high > > profile clients in this space. Once this division turns positive at the PAT > > level, which the company hopes it will happen soon, it will definitely > > give Infosys an edge over others. Also, the breakeven of the consultingdivision will give the much-required boost to the company’s operating > > margins as untill now Infosys has not been able to leverage on its > > subsidiaries’ performance. > > > > > > > > > > — > > Universal vision: To Live, To Love, To Learn, To Leave a legacy > > > > > — > Universal vision: To Live, To Love, To Learn, To Leave a legacy > > >
