Satyam downgraded to SELL
???? Downgraded to SELL. We downgrade Satyam Computers to
SELL with a target of Rs150, based on 4.5x target PE on FY10e
earnings.
???? Maytas acquisition reversed. Satyam had yesterday announced
its acquisition of Maytas Properties (100% stake for US$1.3bn)
and Maytas Infra (51% stake for US$0.3bn). On account of huge
resistance from minority shareholders, the deal was finally
reversed late last night. This is a welcome relief, but the episode
will still raise concerns regarding Satyam’s corporate governance
for a while to come.
???? Question remains. Despite the reversal of the deal, it would still
raise questions regarding the financial health of the Maytas
entities, their promoters and its impact on Satyam finances ahead.
???? Downgrade rationale. The current turn of events raises
questions on the decision-taking abilities of the existing
management of Satyam. While we have not changed our estimates,
we capture this in our lower target PE ratings for this company.
We assign a target PE of 4.5x (same as for IT mid-caps) on FY10e
earnings of Rs34/share to arrive at a target price of Rs150. We
downgrade the stock to a SELL.

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.

We believe that even calling off the deal approved by Satyam’s Board for acquiring
promoter-owned companies, Maytas Properties (100% stake for US$1.3bn) and
Maytas Infra (51% stake for US$0.3bn) will lead to serious doubts on the future
corporate governance of Satyam. During uncertain demand scenario, investors
will always prefer companies with proven, high-quality corporate governance.
Therefore, we downgrade Satyam to SELL from Hold. We recommend switching to
Infosys given any sharp correction within the sector post this event.
???? Investors may insist on changing the senior management. We believe that with
significant institutional investor holding (at >45%) the investors may urge a change in
the senior management, which may lead to some corporate events such as the
acquisition of Satyam. In such a case, the stock may stabilise in the medium-to-long
term in our view. However, in the interim, we expect investor interest to decline.
???? Investors may urge even a buy-back or special dividend. Owing to significant
doubts on Satyam’s corporate governance, we believe the investors may insist on
the management utilising the excess cash on the books (cash equivalents of
US$1.12bn as on September 30, ’08) by buying back equity shares or
recommending special dividend. However, in the interim, we expect investor interest
to decline.
???? Satyam stands to lose in any case. We believe that even after calling off the deal,
Satyam may find it difficult to retain key employees and this may lead to operational
issues with the clients. Therefore, we do not rule out the possibility of Satyam losing
in the current vendor consolidation wave with worsening global slowdown. Other
large-cap IT offshore services companies (even HCL Technologies) will benefit from
the likely consolidation.
???? Downgrade to SELL. This irrational corporate development would lead to a
significant fall in the stock price (to the extent of 25-30%) and therefore, at present,
arriving at a price target is difficult. We would review our rating post more clarity on
future operations. We recommend switching to Infosys given any sharp correction
within the sector post this announcement.

-Excerpts of the report Contributed by a blogger

Allahabad High Court upholds SAP of Rs140
The much-awaited decision of the Allahabad High Court on sugar-cane pricing for the sugar year 2008-09 (SY2009; October 2008-November 2009) was announced on December 8, 2008. Earlier, the Uttar Pradesh Sugar Mills Association (UPSMA) had filed a petition in the said court challenging the state advised price (SAP) of Rs140 per quintal for sugar-cane (of common variety) fixed by the Uttar Pradesh state government as “arbitrary”. The SAP for SY2009 is 12% higher than that for SY2008 (Rs125 per quintal). In its decision the court has upheld the SAP by saying that the petitioners failed to substantiate that the price fixation by the government has been arbitrary and that they could not afford to pay the said price of sugar-cane. We believe the above judgement comes as a negative for Uttar Pradesh sugar mills even as the UPSMA plans to take the matter to the Supreme Court.