Satyam's Moment of Truth Is at Hand

Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent report to clients on Satyam Computer Services (SAY):

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Since December 16, Satyam has been in the news for the wrong reasons. We do not condone the process or rationale behind the Maytas acquisitions. However, the vindictive lynching of management in the Indian media has generally failed to distinguish between one occurrence of very poor governance (that was quickly reversed) and the more serious worry of unlawful conduct. No doubt, management has learned a valuable lesson and is motivated to rebuild its credibility, as well as shareholder value. The January 10 board meeting will likely mark a watershed event in the company’s future. Non-founding management may still have institutional support given its contrition, deep knowledge of Satyam operations and clients – that assumes particular importance in the current unsettled environment – and undisputed track record, i.e., five straight years of 35% EPS growth. Alternatively, to shore up stability, Satyam could decide to invite bids for an outright sale.

Satyam has rejected World Bank claims that it allocated stock on preferential terms to procurement officials and that its invoices lacked adequate documentation for subcontractor fees. Client-vendor friction is not uncommon but we find it curious that this would be played out through the media. World Bank was a top-10 account until late-FY07 and completion of all work since that time has been factored into prior guidance. Satyam is ineligible for vendor status until 2016, along with 300+ entities that have previously suffered such a fate.

We advocate that Satyam 1) promptly assemble a strong board that pledges uncompromising oversight; and 2) launch an aggressive $400- 500 million buyback – approximating 15% of its market capitalization and 40-50% of net cash – in order to salvage some enduring benefit from an otherwise regrettable phase.

SAY is selling at 1) an enterprise value translating into just 3.8x forward EBITDA; and 2) only 6.4x forward EPADS – a steep discount to peers INFY (-46%), WIT (-61%) and CTSH (-47%). Our primary fundamental concern stemming from these developments relates to client apprehension. However, this should be mitigated by the longstanding nature of existing relationships, multi-year contractual agreements and limited exposure since Satyam is one of multiple vendors at most accounts.

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ANALYST CERTIFICATION

I, Ashish Thadhani, certify that all the views expressed in this research report accurately reflect my personal views of the subject companies. I certify that I have not and will not receive compensation with respect to the issuance of this report.

Comments

[ithas:]

Ashish,

Well said. Everyone does make some mistakes in their life. Satyam Chief acted out of greed, but now I think he regrets having brought such a trouble to the company he created. Leaving the present management to continue with a new vigilant board and active shareholders seems the best thing for Satyam.

Satyam should meanwhile return at least 50% of their cash holdings ( which I think will be 1.2-1.3 billion today ) preferably through buy-back, or at least as a special dividend would be nice.

Jan 06 10:22 AM

[satr:]

Finally, someone with sense. An excellent piece written with undeniable logic and apparent integrity. The media cartels who've probably been colluding with so called analysts and traders have caused more disrepute than Satyam's decision not to first present the deal to the shareholders and making a case for why it was beneficial.

Jan 06 11:14 AM

[satr:]

What is really amazing is how IL&FS sold a huge block at 120 rupees, on the dec 24th futures and options expiry; I'd like to believe they did not have short positions which benefited from their ability totake the price down to that level. Their subsequent sells of large blocks at 139 and 176 coupled with L&Ts buying of 2.4% of the shares at 167 suggests that there was no reason whatsoever (unless it was a F&O related price movement) for IL&FS to take the price to 120. The types of hypothetical stories and insinuations bruited about in the press preceded stock price movement up and down- it would be instructive to see who loaded up in the F&O segement on the long side. We seem to have now consolidated around the 170 mark and will perhaps see a rash of positive stories as the price moves up to enrich the long F&O folks, or perhaps even more desperate negative stories as the shorts are forced to cover. Rtaher than see a probe by various quasi govt entities of the satyam governance minutiae, I'd like to see a probe of the analysts-traders-and-f... press cartel.

Jan 06 11:21 AM

[ithas:]

Does anyone have an idea on the impact of possible negative development for Satyam in Upaid case?? It is going to cost $1B as claimed by Upaid?? That seems too much....

Jan 06 12:41 PM

[punk_ash:]

blah blah blah, just check the news on satyam, its over, or better yet, Thadani thinks SAY is cheap at 10 bucks, sell it to him at $10 if he is still buying

Jan 07 02:38 AM

[Soham Das:]

No, Asish,no... Satyam is not a product of vehement media lynching. It has called upon this misfortune by repeated invitations. I am shaking my head, because Asish, certain views were not well researched.

For one, I have a view. A pretty biased view, the management is not good, you can still play with your money and hold it. The management is bad, [?] then stay away from it even if you the pro speculator.

Management of SAY was the most unscrupulous one, I have come across. Read about SAY-UPAID fiasco. [Google is your friend: G: Satyam sued]
Read about WORLD BANK datasnooping fiasco.

FYI, WORLD BANK indeed discovered data snooping happening from modules developed by SAY[ and you know where was it going? China]

The Maytas fiasco now to my surprise was not to save Maytas but something even sinister and shocking. It was to save SAY itself. Seems the balance sheet is blown up.

Goodbye Raju, say hello to new acquirer.

My take: SAY ripe for an INFY takeover. HCL can't because it is now cash strapped due to the recent Axon takeover. But I am hoping INFY puts some legs to its cash reserve and use it to take over SAY.

Jan 07 04:07 AM

[dolyenwon:]

Well, you had written one day too early. Real truth is if anything looks too good to be true, it is probably a creation by a crook.

Jan 07 06:23 AM

[Stoex:]

Satyam plunges over 70%; Chairman Raju resigns! (a lesson to be learned)

More importantly look at the financial firms touting the stock as a "buy" or as a "hold". The books were cooked and AGAIN none of the CFA's, MBA's, Phd's, Compliance Boards, SEC in their roles caught on. Where or where is due diligence? Where is oversight headed?

Here's the lesson:
Why do we the investing public let any brokerage firm move our emotions about "hitting" an earnings estimate, "coming in below expectations", being added to a "buy conviction list" and so on and so on?
SAY recently rumored to be a buyout candidate??? Would due diligence been apparent by the advising firm?

SAY is not alone in their less than ethical behavior. Where was the board? How qualified was the board? Etc.

Jan 07 07:08 AM

[Swiss Investor:]

Really bad timing for your article, Ashish.

Jan 07 08:23 AM

[Zyx007:]

Extremely unfortunate timing, but with a market cap that is now down to less than USD 500 million, an attractive target for Infy or TCS assuming legal liabilities are resolved. Makes you wonder about PWC's ability to "audit" any firm, given that this has been ongoing for several years.

Jan 07 09:07 AM

[andyn:]

India's Enron... so what lessons can one take from that.
1. It cant be just the chairman doing this... there are many persons with their hands in this mess / fraud.
2. Enron caused the demise of their auditors Arther Anderson, similarly this may cause a big blow to PWC, Satyam's auditor (were they sleeping all these years?)
3. How about the banks? Lots of banks had to pay huge fines due to their complicity with Enron. There are many banks who supposedly had Satyam's "5500 crore" rupees...wonder who would be hit the most?
4. Board of directors.... the less said of them, the better.
All in all, this might bring about a lot of skeletons from the closet. The true losers are the shareholders as well as employees.

Doesn't mean that all companies are bad though... there might opportunities to pick up INFY, WIT when they are sold off with this.

Jan 07 09:59 AM

[Sekar:]

Ramalinga Raju was spinning cotton in 1992 when I owned Satyam Spinning Mills shares. Raju's crude luck brought him into IT area without any strong foundation. Raju leapfrogged TCS and Wipro (by the way was selling Hair oil and assemblying PCs) in 10 years using dubious practises. H1B Visa system was completely abused by Satyam using political connections in US and India. All the glitzy office complexes in Secunderabad are just empty coffins of greed. I hope Satyam's downfall will expose more skeletons with India's outsourcing madness.

Jan 07 06:17 PM