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.
