Satyam closed FY02 with a 42% growth in topline and 55% net profit growth (excluding extra-ordinary items for FY01 and FY02). With the performance, it even topped Infosys’ 37% growth in topline and 28% growth in net profits. Despite this, the stock trades a significant discount to its peers.
The reason for the discount in valuations is the company’s loss making subsidiaries. For FY02, while the company posted a standalone EPS (earnings per share) of Rs 14.3, the consolidated EPS was just Rs 2.5. However, all the losses that the subsidiaries posted were not on account of operations. A big hole in the bottomline was due to Rs 4.4 bn write-off towards impairment in goodwill. With this write off Satyam has completely written of the total amount invested in indiaworld.com and cricinfo.com. Thus, with future write-offs of such magnitude unlikely, considering the company does not buy another dot-com at absurd valuations, the consolidated EPS will move up towards the company’s standalone EPS.
Further, the management has already indicated that it plans to sell its stake in its Internet subsidiary Satyam Infoway (Sify) that is responsible for major chunk of losses. The company closed its foreign subsidiary Dr. Millennium Inc. and is in the process of closing Satyam (Europe), Satyam Asia and Satyam Japan. It has also restricted its investments in VisionCompass Inc.
While concerns are diluting, the growth prospects of technology sector is a strong positive in favour of the company. Where the company stands out from competition is that it is in a select club of software majors that can offer end-to-end solutions. Software majors like Satyam that already have significant client base and therefore, are better known in the western markets, are the obvious choice for companies that are looking at offshore development services. Thus, while the IT services sector is likely to show strong growth in the future, companies like Satyam are likely to grow ahead of the sector.
Therefore, considering the two strong positives, i.e., Satyam growing ahead of the sector growth rate and scenario of valuations catching up with its performance in wake of subsidiary concerns diluting, one could look at Satyam as an investment opportunity.
However, the element of risk is extremely high in Satyam. This is reflected in the lower valuations the stock trades at. The reason for the stock being extremely risky is the fact that the management has in the past made investments at very high valuations, which have been subsequently written off almost entirely. Further, the Department of Company Affairs is investigating the company for violations of accounting norms. The stock is definitely not for investors looking at a low risk investment.
To help you make your investment decision we have recently updated our research report on Satyam. The research report lists reasons to buy and reasons not to buy the stock. The investment cases and concerns are supported by forward projections of financials till FY05E. From FY02, we have consolidated the financials and the three-year forward projections are based on consolidated numbers.
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