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Satyam: Subsidy in valuations? - Views on News from Equitymaster
 
 
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  • May 10, 2001

    Satyam: Subsidy in valuations?

    Satyam has filed a registration statement with the Securities Exchange Commission (SEC) in the US relating to the offer of American Depository Shares (ADS). According to the statement Satyam intends to offer 12.5 m ADS representing 25 m equity shares. Therefore, 1 ADS works out to be equal to 2 domestic equity shares.

    Satyam plans to raise around US $ 150 m through the issue of ADS. Accordingly, the price of one ADS is US$ 12. As one ADS is equivalent to two equity shares, the valuation of one equity share comes to around Rs 279. This translates to a P/E multiple of 27 times its FY01 earnings. This valuation is quite steep considering Satyam’s loss making subsidiaries.

    The size of US$ 150 m is almost half the size of what it had planned to raise earlier. In October 2000, the company had received government approval for raising funds upto about US$ 310 m by issuing ADS. The crash in the global and domestic stock markets since February 2000, could have contributed to the company’s decision to halve the size of the ADS issue.

    The money raised from the ADS issue is intended to be utilized in the expansion of the existing facilities and telecommunication infrastructure at Bangalore, Bhubaneshwar, Chennai, Mangalore and Pune. A part of the money will also be utilized to develop new facilities in India and abroad. The company also plans to reduce its debt (Rs 1,720 m).

    According to the US GAAP Satyam had reported a consolidated net loss of US$ 29 m in the first nine months of FY01. This is due the losses made by its subsidiaries. To reduce the losses, Satyam, in April fired the Chief executive of a subsidiary (VisionCompass) along with 39 other employees. This exercise would reduce VisionCompass’ operating costs by nearly 70% and thus, bring down the losses.

    (Rs m) Satyam
    Infoway
    VisonCompass
    Inc
    Satyam
    Europe Ltd
    Satyam Asia
    Pte Ltd.
    Dr. Millenium
    Inc.
    Satyam
    Japan KK
    % Stake 52.5% 100.0% 100.0% 100.0% 100.0% 100.0%
    Profit / (Loss) for FY00 (263) (512) (52) (21) - (13)
    Satyams share (138) (512) (52) (21) - (13)
    Total (737)          

    However, excluding the losses on account of its subsidiaries and deffered stock compensation expenses, which together were responsible for 95% of the deductions from the Indian profit figures, Satyam (according to the Indian GAAP) has reported a net profit of US$ 68 m (excl extraordinary income) for the fiscal FY01.

    (Rs m) 9m FY00 9m FY01 Change
    Profit as per Indian GAAP Financial Statements 885 3,749 323.7%
    Add / (Deduct) :      
    Loss of Subsidiaries and Joint Ventures (513) (1,406) 174.0%
    Deferred Stock Compensation Charge (491) (1,767) 260.2%
    Amortization of Goodwill (51) (154) 200.3%
    Other Income not taken as income under U.S. GAAP (4) - (1,701)  
    Others, net 86 (54) -162.9%
    Net Income/(Loss) as per U.S.GAAP Financial Statements (85) (1,334) 1477.8%
    9m ended 31 December 2001

    The company has shown an impressive performance for FY01. It had managed to avoid a dip in sequential revenues growth by offsetting lost business in the area of e-commerce by taking up more business in the area of legacy systems.

    The valuations that the company gets would be very interesting to watch as; Satyam is a loss making company (on a consolidated basis) from the Indian software sector. The valuations in the domestic bourses have certainly not taken into account the losses from its subsidiaries. It is doubtful the same will be repeated on the NYSE. .

    The issue of 12.5 m ADS will dilute the equity base of the company to 306 m from a current 281 m. At a current market price of Rs 234 and an equity base of 306 m shares the stock is trading at a P/E of 22 times its FY01 earnings.

     

     

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