CLSA says Satyam Computers need to answer many questions
Despite Satyam’s reversal of its decision to buy out common promoter owned
realty and construction businesses, questions will linger on, perhaps for a long
time. Why did the Board not oppose the move? Who voted for and against the
resolution? Was the Board truly independent? Business fundamentals were
already deteriorating, and we are reducing earnings 14-17% for FY10-11, but
these are now peripheral to the central issue. The harm done to Satyam’s
credibility, so arduously repaired in the last few years of business
improvements, is likely to be long lasting. Our target price of Rs160 implies
1.0xFY10 book, or 5xFY10 earnings. Valuation damage will last. SELL.
The morning after
Yesterday, Satyam (where promoters own <9% equity) announced an intent to
buy out Maytas Properties (privately held, largely by Satyam’s promoters) and a
51% stake in Maytas Infra (36% owned by Satyam promoters, publicly listed).
The US$1.6bn purchase would have made Satyam’s promoters/affiliates richer by
nearly US$1.48bn, taken off all the cash in Satyam’s books, added some debt,
and put together a company with IT Services, real estate and construction as
business segments. Investor outrage at this move was well justified, and it is
some relief that this decision was reversed late last night.
A long lasting damage done
Satyam has been here before. In 2000-2003, Satyam put together a cluster of
Internet businesses, including portals and ISPs, signed on several joint ventures,
and had large gaps between stand-alone, Indian GAAP and US GAAP accounts.
The last four years had seen Satyam’s operations improve, making it the
industry’s best performing large cap stock in 2005 and then again in 2007. The
latest episode is one too many for Satyam’s credibility, however, and we suspect
that after the immediate sigh of relief at the reversal of the decision, doubts will
linger. We retain a SELL rating on the stock, from Under-perform earlier, and
believe Satyam’s case for a core tech holding has weakened for long.
Business fundamentals were already deteriorating – EPS cut 14-17%
Questions around Satyam’s corporate governance policies are ill-timed, coming
amid continuing downslide in sector-wide business fundamentals. All else
remaining the same, we have still had to cut earnings 14-17% for FY10-11, and
are now forecasting a 2-3%YY decline in US$ revenues for FY10, and a 14-15%YY
EPS drop, the worst among the top-4 vendors. Relative PE trades based on
discounts to larger peers are largely irrelevant after the latest episode, but we
fear collateral damage as Satyam defends its customer base from predatory
attacks from competition, and perhaps pricing will get even weaker. SELL Satyam.
-Excerpts from a report contributed by bloggers.
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