Coming in last (but Motley Fool Stock Advisor would argue, not least) place in the trio of India's leading U.S.-listed outsourcers, Satyam Computer Services (NYSE:SAY) reports its fiscal Q2 2008 numbers tomorrow.

What analysts say:

  • Buy, sell, or waffle? The vast majority of the 29 analysts following Satyam rate this stock a buy -- 25 in all. Of the rest, three are in the hold camp, and one says to sell.
  • Revenue. On average, they're looking for 36.5% sales growth to $480.6 million.
  • Earnings. Profits are predicted to lag a bit, up 30% to $0.26 per share.

What management says:
Citing "strong volume growth," "increased revenue," and "operational efficiencies," Chief Financial Officer Srinivas Vadlamani warned that just like rivals Wipro (NYSE:WIT) and Infosys (NASDAQ:INFY), Satyam faces a significant obstacle in the form of "7% rupee appreciation during the quarter." Actually, make that two obstacles. On the one hand, the more the rupee is worth relative to foreign currencies, the fewer rupees can be bought with fees earned in those foreign currencies. On the other hand, if Satyam raises its foreign-currency prices to compensate, it begins to price itself out of the market versus service providers based in the countries to which those foreign currencies belong.

Regardless, CEO B. Ramalinga Raju called the first quarter a "good beginning to FY08" and said Satyam expects to earn more than $2 billion this year, exchange rates notwithstanding.

What management does:
Revenue growth of 30%-plus will go a long way toward making that happen. But at the same time, the exchange rate issue continues to depress the margins that Satyam earns on its revenue. For two quarters running now, gross, operating, and net margins have all been lower.

Margins

6/05

9/05

12/05

3/06

6/06

9/06

Gross

37.2%

37.5%

36.7%

36.9%

35.8%

35.3%

Operating

20.0%

20.7%

20.5%

20.6%

20.0%

19.6%

Net

22.7%

24.2%

23.8%

20.7%

20.4%

19.6%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
As if the exchange rate problems weren't bad enough, Fool analyst Tim Hanson uncovered -- and covered in depth for Stock Advisor back in June -- another issue plaguing Satyam: Employee turnover. As Tim described it, offering "double-digit annual salary increases" and "free country club membership" for employees and their families hasn't been enough to keep them from jumping ship from Satyam, where the workforce turns over 15% every year. So the company is stealing ideas from rivals like Accenture (NYSE:ACN) and IBM (NYSE:IBM) for how better to keep its employees fat and happy, and at their desks.

How's it working out? Tim says: "retention rates are improving," but "the problem persists." So long as it does, you can expect one additional factor acting to depress Satyam's margins (and make revenue growth even more key to expanding profits): The firm's operating costs will remain high as it pays through the nose to locate replacement workers for the ones it loses and richly compensate the ones still at their desks.

What's with Satyam's strange fascination with peacocks? Learn more about this, and other questions you may never have thought to ask, when you read Tim's special report in the June update to Stock Advisor -- yours free along with full access to the site when you sign up for a free trial to the service. 

Fool contributor Rich Smith does not own shares of any company named above. Accenture is an Inside Value recommendation. The Motley Fool has a disclosure policy.