Is Satyam Computer Services Ltd really overvalued?
6th March,2000
When we talk about IT companies in India, the companies that first come in our mind include the sector leaders such as Infosys, Satyam, Wipro, Pentafour etc. Moreover the successful listing of Infosys and Satyam at the Nasdaq have added to the sentiments of the investing community especially towards these two scrips. The performance of these scrips at the Nasdaq is reflected at the domestic bourses, if not exactly, upto a certain extent.
Satyam is one of the major gainers in the IT sector. In terms of percentage gains the scrip has surpassed even that of the industry leader Infosys, a company which is considered as a benchmark in the Indian IT sector. Infosys is the most admired company in India, not only in the IT sector but also in the industry circles, in terms of quality, business model, HR policy, transperancy and visionary leadership.
Despite all the above facts, Satyam gained almost double than that of Infosys, in percentage terms. Over a period of one year, Satyam gained 1046% compared to 547% gained by Infosys. So, what could be the probable reason behind this, let's find out.
At present Satyam is trading at a P/E of 210 times its expected FY01 earnings, which seems to be quite high, since the sector leader Infosys is trading at a P/E of 236 time its FY01 earnings, despite having a turnover which is 1.3 times that of Satyam. The table given below shows the P/E ratio of four leading IT companies of the country.
Company PAT (E) Equity EPS Price P/E
Infosys 2800 661.4 42.3 10,000 236.2
Wipro 3100 2291.5 13.5 6,670 493.0
NIIT 2200 386.5 56.9 2,361 41.5
Satyam 1700 562.4 30.2 6,361 210.4
However, if one looks at the company's valuation closely, one might have a totally different view. Satyam Computer holds around 57% stake in its Nasdaq listed subsidiary, Satyam Infoway, which has a market capitalization of around Rs360.94bn. 57% of this comes to around Rs205.74bn. Now, if out of the market capitalization of Satyam in the BSE, which is around Rs357.74bn, this Rs205.74mn (57%) is knocked off, the effective market cap comes to 152bn. This translates into a share price of Rs2703, which reflects only its core business.
Taking this adjusted price of Rs2703 into account, the P/E works out to 89 times its Expected FY01 earnings. The table given below will highlight this point.
Company PAT (E) Equity EPS Price P/E
Infosys 2800 661.4 42.3 10,000 236.2
Wipro 3100 2291.5 13.5 6,670 493.0
NIIT 2200 386.5 56.9 2,361 41.5
Satyam 1700 562.4 30.2 2,703 89.4
Thus the table clearly indicates that post adjustment, the P/E ratio works out to 89, which is at a considerable discount to its peers. Moreover, if one looks at the price movement of the scrip, one would find that the scrip started witnessing a surge over the past six months. Over a period of six months the scrip gained more than 640% compared to 260% by Infosys.
The upsurge in the past six months came after Satyam Infoway stepped in the picture and emerged as a prominent ISP in the Indian market by way of acquisitions and tie-ups. Thus, the investing community started re-rating Satyam as an internet company because of its holding in Sify. Sify is currently competing with companies like VSNL, a company that has a virtual monoploy in the sector. Sify has made a big move into the content area with acquisition of IndiaWorld. Recently, DoT has also granted licence to Sify to establish five international gateways in the country, which means the company will be free from its competitor?s (VSNL) monopoly over international gateways. Sify also seems to have drawn the attention of investors overseas, which is reflected in its successful ADR issue, which concluded recently. The investors grabbed the Sify ADS at a premium of 9.25%, thereby enabling the company to mop up around $150mn. The company has also recently announced series of tie-ups with companies like Crisil (for B2B), RPG Netcom Ltd (for cable internet), ICICI (for on-line distribution of ICICI products) etc.
Apart from Satyam Computer's relationship with Sify, the company's core business also looks good. The company is a prominent supplier of software services with an enviable client list consisting of a number of F500 companies. The company's order book also looks attractive. It has recently bagged order worth $60mn from two major overseas companies, out of which one is from a US based insurance company, State Palm Insurance Inc, and the other from an engineering and services giant. Apart from this, the company has Joint Venture with several global giants like GE, Ford etc. One of its 50:50 joint venture Satyam-Venture Design and Development center Ltd, has bagged the Ford Thunderbird job, which is a part of the re-designing of Ford Motors' most popular "Thunderbird" car. The venture is also eyeing global automobile majors like GM, Volkswagen, Benz etc for more orders.
In a scenario, where its core business is doing extremely well and its Internet subsidiary is causing quite a few waves, Satyam might not look as expensive as it is made out to be (from its P / E). However, a point to be remembered here is that Indian government regulations will not permit Satyam to reduce its stake in Sify to anything below 51%. That leaves Satyam only a small window to further raise funds for either more acquisitions or other business plans - until Government regulations change.
Abhijit Mukherjee
-Probity |
