A little over a year has passed since the near demise of the company behind India?s largest corporate fraud, Satyam Computer Services, a company that at the time provided services to more than a third of Fortune 500 companies.
While a lot of water has flown under the bridge, since the fraud became public, the prompt actions taken by the government hitherto, the buyout of Satyam by Tech Mahindra and the quiet turnaround the company has seen since, has prompted many to start looking at a re-entry on it.
What is the stock actually worth?
The last time Satyam reported revenue under US GAAP was back in October 2008 when they reported revenue of $652.2 million. If revenue was indeed inflated 20%, let us assume actual revenue was $543.5 that quarter. Revenue most likely declined after the scandal broke out and at the time Tech Mahindra acquired a stake in Satyam, full year revenue was expected to be $1.3 billion.
If Satyam does post $1.3 billion in revenue for fiscal 2010 ending in March 2010, based on its current market cap of $1.86 billion, the stock is trading at 1.43 sales.
With competitors like Wipro and Infosys at 5.63 and 6.30 times sales respectively, Satyam is indeed trading at a steep discount to its peers when you look at revenue.
However Satyam?s operating margins were 3% when the scandal broke out while Wipro and Infosys sport operating margins of 17.91% and 35.5% respectively.
Unless Tech Mahindra can improve Satyam?s operating margins, which it most likely will, the steep discount appears to be justified. Assuming Satyam does post revenue of $1.3 billion, manages to improve its operating margins and we apply a 50% discount to Wipro?s 5.63 times sales valuation, a market cap of $3.65 billion is arrived for Satyam, representing 64% upside for the stock from current.
What happened to the stock last year?
The stock has moved up significantly after hitting single digit lows in January 2009 and is trading at 118 representing a gain of 1,800%. What is noticeable is the way volumes build up every time the stock has seen a correction. This shows accumulation pattern hinting at rising interest in the stock.
With the Indian economy expected to grow by 7 to 8% for the current fiscal year that ends in March 31, 2010 and a world bank real GDP growth forecast of 8% in 2011 and 8.5% in 2012, India is certainly a favored investment theme.
Despite the fundamental reasons for buying into India and the cost cutting in developed countries that has fueled the rise of Indian software companies like Infosys, Wipro and Satyam, the industry does face a number of headwinds in the form of a weak dollar, rising salaries and increased competition from companies like IBM that have developed large operations in India. Overall it appears that Satyam might be worth considering as a highly speculative investment that may do well should conditions at the company improve in 2010 and beyond and who knows it might just be the multi bagger for the year FY2010 -11.
This not a recommendation to buy/sell/hold the stock. The author does not have any personal interest in the mentioned stock. The writer is a derivatives analyst