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Satyam plans to neutralise debt with equity - Views on News from Equitymaster
 
 
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  • Aug 25, 1999

    Satyam plans to neutralise debt with equity

    According to news reports, Hyderabad-based Satyam Computers has approached financial institutions (FIs), including UTI, LIC and GIC to place shares worth Rs 3.5 bn on a private placement basis. However FIs find Satyam's price at Rs 1,900 (cum-bonus) per share on the higher side, and would like a 15% discount. Earlier, Satyam had announced a 1:1 bonus and is currently trading at an ex-bonus of price of Rs 942.

    Since its inception in 1987, Satyam Computers has focussed on software development and IT services on mainframes (legacy system). Close to 60% of revenues come from mainframe-related jobs. Its strength in legacy systems enabled it to secure large Y2K-related contracts, which accounted for 28% of FY99 revenues.


    FY99 Revenue break-up

    Satyam's high exposure to Y2K-related assignments is cause for some concern. The management expects this to come down to a more reasonable level of approximately 10% in FY2000. However, fall in Y2K-related revenues will be offset by increase in onsite development revenues. The company has already bagged orders worth Rs 3.5 bn, which amount to 50% of its full-year forecast.

    In the future, Satyam plans to launch an American Depository Receipt (ADR) issue to enable it to make overseas acquisitions. But before it goes ahead, the company plans to become debt-free, which is why it wants to go ahead with the private placement of equity. The private placement proceeds will be used by Satyam to neutralise its debt, which could make it look more attractive to overseas investors. Another factor that will stand the company in good stead is the fact that it has achieved a SEI-CMM Level 5 certification, only the second company after ICIM to bag this prestigious accreditation.

    Market View:

    Satyam's successful foray into products (Vision Compass), combined with the strong performance of its ISP arm (Satyam Infoway) and spurt in onsite revenues are factors that have prompted analysts to flag the stock as a 'BUY', regardless of its high Y2K exposure and the large quantum of debt in its books.

     

     

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