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Satyam: The clean up

Oct 5, 2002

In a move to address one of the most pressing concerns, Satyam Computers has decided to dilute its holding in its loss making subsidiary Sify to 35% (presently 52.5%) through fresh equity dilution. As a result of this development, Satyam will no longer have to consolidate Sify’s financials with its own from FY03 onwards. To put things in perspective, in FY02 Satyam posted an EPS of Rs 14.3 on a stand-alone basis. However, on a consolidated basis the EPS was a meager Rs 2.5. This was on account of losses in Sify, which wrote off Rs 4,472 m towards diminution in value of investments in Indiaworld.com and ciricinfo.com.

With the dilution of its stake in Sify, Satyam’s consolidated EPS will almost get aligned with its stand alone EPS. The marginal difference will be due to the company’s 100% subsidiary VisionCompass. Earlier, as a part of it’s clean up act, the company had dissolved four of its foreign subsidiaries in 1QFY02 and had written off Rs 408 m towards the closures.

According to the deal, SOFTBANK Asia Infrastructure Fund (SAIF), and VentureTech Solutions Private Ltd. (VentureTech) will buy US$ 20 m newly issued shares of Sify. A SAIF controlled company (SAIF Investor) has agreed to buy approximately 7.5 m newly issued ADRs (one ADR is equal to one equity share) for a sum of US$ 13 m. Therefore, the price of one ADR works out to US $1.72 per ADR. Further, VentureTech will invest US$ 3.5 m for approximately 2 m equity shares at the same price. VentureTech will have an obligation to invest US$ 3.5 m additionally in equity shares on or before 30th April 2003 at the same price. As a result of the new issues, Sify’s equity base will expand from 23.2 m shares to 34.8 m shares. However, the inflow of cash consequent to the deal will be limited to Sify and will not come into Satyam’s books.

Investor Amount (US$ m) No of shares (m) Price/ADR (US $)
SAIF Investor 13.0 7.6 1.7
VentureTech 3.5 2.0 1.7
VentureTech 3.5 2.0 1.7
Total 20.0 11.6

In 1QFY01 (April to June 2000), Satyam had sold a 1.6% (347,200 shares) stake in Sify to Government of Singapore Investment Corporation for a consideration of US$ 49.3 m. Thus, one ADR was valued at US$ 142. The recent dilution is therefore at a significant 99% discount to the valuations seen at the height of the technology boom.

Valuations FY03E EPS (Rs) CMP (Rs) P/E (x)
Satyam Computers 16.8 208.0 12.4
Infosys 143.5 3,500.5 24.4

At the current market price of Rs 208, Satyam Computers is trading at a P/E multiple of 12x its FY03 estimated standalone earnings. As the consolidated EPS, converges towards the standalone EPS, the stock could see some improvement in valuations going forward.

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